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Retirement Planning > Saving for Retirement

Lawmakers Unveil Pension Reform Proposal

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House Republicans have introduced a bill that could make sweeping changes to the laws that govern defined benefit pension plans.[@@]

The number of the new bill was not immediately available.

One key provision of the bill would restrict the ability of employers and union leaders to promise additional benefits when a plan was severely underfunded.

The bill also would prohibit employers and union leaders from increasing benefits or providing lump-sum distributions if a pension plan were less than 80% funded unless the plan sponsor “immediately makes the necessary contribution to fund the entire increase or payout.”

Moreover, the bill would prohibit further benefit accruals for plans when assets appear to fund less than 60% of projected payouts.

“This effectively freezes the plan,” says Rep. John Boehner, R-Ohio, chairman of the House Education & the Workforce Committee, one of the bill’s lead sponsors.

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 “The airline situation and similar examples in other American industries are the consequences of outdated federal pension laws that don’t reflect the realities of today’s economy.”

The American Benefits Council, Washington, says the new bill would replace all current funding rules, including the Employee Retirement Income Security Act funding rules and deficit-reduction rules, with a single set of funding rules closely modeled on the current deficit-reduction rules.

The primary differences between the new bill 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.

The bill also includes investment advice provisions proposed by Boehner for several years and supported by the life insurance industry. These provisions would let employers provide rank-and-file workers with access to a qualified investment advisor who could 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 says.

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, to make sure that plans will have enough cash to meet obligations during the future periods when pension benefits will actually be due.

The bill would limit benefit increases for plans funded below stated thresholds and would restrict funding for “nonqualified deferred compensation plans” for highly paid employees when those plans were provided by a sponsor with a severely underfunded plan.

The bill would increase Pension Benefit Guaranty Corp. flat-rate premiums to $30 per participant.

Variable-rate premiums would stay at $9 per $1,000 of underfunding, but the premiums would be based on the new definition of liability. There would no longer be exceptions to the variable-rate premium rule.

Boehner’s office has told officials at the ABC that the bill will include a hybrid-plan title but will not include any hybrid-plan provisions. Boehner “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,” according to the ABC.

ABC officials say Boehner’s staff comments suggest that 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 rules, including requiring public disclosure of much of the information that employers send to the PBGC.

In related news, Sen. Gordon Smith, R-Ore., and Kent Conrad, D-N.D., are introducing another retirement bill, the Retirement Savings and Security Act of 2005.

The number for that new bill is not yet available.

The new bill would encourage employers to include lifetime annuities and individual retirement account annuities in retirement plan distribution options, and the bill also would encourage employers to enroll workers in 401(k) plans and other defined contribution retirement plans automatically.

Another section of the bill would let employees use assets left over at the end of the year in flexible spending accounts to supplement their retirement savings.

The American Council of Life Insurers, Washington, is backing the new Senate bill.

“The need for the legislation is clear,” ACLI President Frank Keating says in a statement about the new bill. “More people need to participate and save in their employer-sponsored retirement savings plans, and they need help managing their assets to ensure they last a lifetime.”


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