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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 “The airline situation and similar examples in other American industries are the consequences of outdated federal pension laws that don’t reflect the realities of today’s economy.”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.

The single-employer funding provisions of the bill would use a modified corporate bond yield curve to value pension liabilities. In comments regarding the bill, Boehner said the objective is to measure the dates when future liabilities come due, those due within 5 years, those due in periods between 5 and 20 years, and liabilities due after 20 years and until the estimated end of the plan’s obligations.

The bill would limit benefit increases for plans funded below stated thresholds and would restrict funding for nonqualified deferred compensation plans provided by a sponsor with a severely underfunded plan.

The measure would increase PBGC flat rate premiums to $30 per participant; variable rate premiums would stay at $9 per thousand of underfunding but would be based on the new definition of liability. There would no longer be exceptions to the variable rate premium, i.e., the VRP would be payable on the first dollar of underfunding and the full funding limit exemption would be repealed, ABC officials said.

According to sources, Boehner has told officials at the ABC and other interested parties that the bill will include a hybrid plan title but will not include any provisions. An ABC summary of the bill’s provisions stated that Boehner “said that he has not been able to reach agreement with Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, on how to deal with hybrid plan relief.”

The ABC officials interpreted Boehner’s staff comments as indicating Thomas “is inclined to adopt the Bush administration’s proposals on hybrid plans.”

The bill would make a number of changes to current law disclosure, including public disclosure of information provided to the PBGC except sensitive corporate information.

The ABC analysis said the bill includes extensive multiemployer plan funding reforms.

James Klein, president of the ABC, confirmed that the legislation introduced by Boehner and Johnson was in response to widespread industry concern that the Bush administration proposal, released in January, went too far and would have served as a disincentive for companies to retain existing programs or start new ones.

“We do like it better than the President’s proposal,” Klein said. He added that the latest bill “tried to be sensitive to the concerns raised by the President’s proposal.”

But he declined to embrace the new legislation totally. “The specifics of the new proposal need to be carefully examined. The devil is in the details.”

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,” said Rep. John Boehner, R-Ohio, chairman of the House Education and the Workforce Committee, in introducing a pension reform bill.


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