Pension Protection Act made retirement security more tenuous
The Pension Protection Act of 2006 did the exact opposite of what it was intended to do, which was improve retirement security in the United States, according to research by the National Institute on Retirement Security.
Rather than protect pensions, as it was designed to do, the market-based funding requirements increased plan costs and cost volatility to the point where corporations decided it was time to either freeze or terminate their plans. The amount companies had to pay to the Pension Benefit Guaranty Corporation also continued to rise, giving even more incentive for plans to terminate.
“Congress has gone back into the legislation six times since the bill passed and temporarily extended relief from the funding rules,” says Diane Oakley, executive director of the National Institute on Retirement Security. “When you look at the dollars, it helped mitigate volatility but doesn’t give pension plans long-term predictability,”
“We saw this coming. Before the PPA was passed there was a number of private sector pensions, even plans that were well-funded, starting to freeze benefits,” she adds.
The PPA was enacted to ensure the solvency of private sector DB pension plans and to ensure the solvency of the Pension Benefit Guarantee Corporation, the independent government agency that oversees and insures private sector DB plans. To make sure that plans remained financially solvent, the PPA made annual funding requirements stricter than they had in the past, no matter a plan’s current funding levels, according to NIRS.
The law raised a plan’s funding targets from 90 percent to 100 percent; amortization of funding shortfalls was cut from 30 years to seven years; more conservative funding assumptions were required; and the range of years employers may use to average interest rates to calculate the value of assets and liabilities was shortened from four to five years to just two years, NIRS found.
“The idea was that if plans calculate their cost based on current market interest rates, then they will be less likely to be underfunded in any given year,” the NIRS report said.
Under the PPA, PBGC premiums did not go up but the premiums for many plans did go up because the “stricter rules made virtually all plans look more underfunded overnight,” NIRS said, “and the PBGC bases its premiums partially on the level of plan underfunding.”
Under the Deficit Reduction Act of 2005, PBGC premiums rose from $19 per participant to $30 per participant for single-employer plans and from $2.60 to $8 for multiemployer plans.
NIRS found that there has been increased participation in corporate-sponsored defined contribution plans because of automatic enrollment, “but the overall changes are not enough to ensure adequate retirement security for most workers. Contribution rates are far too low and perhaps even lower than they would be without auto enrollment.”
Another problem is that companies that have phased out defined benefit plans do not contribute as much to their defined contribution plans, which undermines retirement security, Oakley says.
So, even though DC plans have improved with the use of auto features like auto enrollment and automatic escalation, DB plans “still offer the best path to retirement security,” according to NIRS.
One solution to try and keep the DB plans that still exist is to “permanently ease the funding requirements — rather than continuing with the stop-gap measure that Congress has passed several times since the PPA — to ensure DB plan sponsors more predictability and less volatility in their funding requirements,” the report said.