Sweeping Pension Reform Bill Introduced In The House

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House Republicans have introduced sweeping legislation to reform the nation’s pension laws, primarily the rules governing defined benefit plans.

The latest bill was prompted by recent disclosures that United Airlines used loopholes in the current law to not properly fund its pension plans over the last 10 years, resulting in a bankruptcy court giving United permission to dump those plans onto the Pension Benefit Guaranty Corporation.

It also was drafted because U.S. companies had warned legislators that a bill proposed by the Bush administration earlier this year was too harsh and would act as a disincentive for companies to retain or create such programs.

The bill was introduced by Rep. John Boehner, R-Ohio, and Rep. Sam Johnson, R-Texas.

One key provision is that the bill would restrict the ability of employers and union leaders to promise additional benefits when a plan is severely underfunded. The bill prohibits employers and union leaders from increasing benefits or providing lump sum distributions if a pension plan is less than 80% funded unless the plan sponsor “immediately makes the necessary contribution to fund the entire increase or payout.”

Moreover, it prohibits further benefit accruals for plans when assets fund less than 60% of projected payouts. Boehner said “this effectively freezes the plan.”

“The recent financial troubles and pension terminations at United Airlines underscore the need for fundamental pension reform,” said Boehner, who is chairman of the House Education and the Workforce Committee, in introducing the bill. “The airline situation and similar examples in other American industries are the consequences of outdated federal pension laws that don’t reflect the realities of today’s economy.”

Under an analysis of the bill by the American Benefits Council, the bill would replace all current funding rules, including the ERISA funding rules and the deficit reduction rules (DRC), with a single set of funding rules closely modeled on the current DRC rules.

The primary differences between the new legislation and current law are that plans would be required to fund to a target of 100% of current liability and the shortfall between current liability and assets would be amortized over 7 years. Another difference is that current liability would be measured using a modified yield curve interest rate and a more restrictive asset smoothing rule.

It also includes investment advice provisions proposed by Boehner for several years and supported by the life insurance industry. These provisions allow employers to provide rank-and-file workers with access to a qualified investment advisor who can inform them of the need to diversify and help them choose appropriate investments. The bill also includes tough fiduciary and disclosure safeguards to ensure that the advice provided to employees “is solely in their best interest,” Boehner said.

One objective of the bill is to require that employers progressively make more contributions to pension plans as employees get older in order to ensure that employers meet their pension promises when workers retire.