COLI provisions are part of a larger pension reform bill
The Senate Finance Committee on July 26 gave its approval to legislation aimed at restoring confidence in pension plans and codifying the use of corporate-owned life insurance, although critics remain concerned that the bill will not provide enough certainty for employers.
The bill contains provisions that would make the current “best practices” for using COLI into law. The bill would limit COLI to covering only highly compensated employees and would require the consent of the employee being covered. Under the law, a highly compensated employee is one making at least $90,000 annually or in the top 35% of the company’s salary structure. Corporate-owned life polices are used by employers to protect against the loss of a valued employee and also are used to help fund benefit programs, including pensions.
“This legislation would enhance protections for employees by setting standards for informed consent,” said Roger Sutton, president of the Association for Advanced Life Underwriting. “It also would ensure the continued viability of COLI as an important business planning tool that is used responsibly for the benefit of employers, employees and their families, and the general public.”
Frank Keating, president of the American Council of Life Insurers, noted that the committee passed a similar bill in February 2004. This version appears to have better chances of passage, however, he said. “A COLI bill identical to the provisions passed by the committee today also has been introduced in the House, where it enjoys the support of 31 members of the Ways and Means committee, a strong majority of the panel,” he said.
The issue of pension security took on added importance for lawmakers in the wake of United Airlines’ pension default, which put the cost of the airline’s multibillion-dollar pension plans in the hands of the Pension Benefit Guarantee Corp.
“The fragile state of our nation’s pension plans has caught the attention of Americans everywhere,” said committee Chairman Sen. Charles Grassley, R-Iowa, in his opening remarks. “It was not long ago that American workers used to be fairly sure of a good pension plan. That’s not the case anymore. There are a lot of reasons for that, some within Congress’ control and some not in our control. We need to fix the problems within our control.”
The main thrust of the legislation, which is known as the National Employee Savings and Trust Equity Guarantee Act, is designed to improve transparency in the funding of pension plans, so that employees will be able to monitor the plans and companies will not be able to avoid making contributions. “Current law allows companies to hide big pension losses from employees and the public at large,” said Grassley. “So-called ‘smoothing’ techniques hide the pensions’ true financial condition. These techniques allowed United Airlines and other companies to avoid making pension contributions even while the pension plans were going down the tubes. We need to protect workers from bad actors and give them more timely knowledge about their pension funding status.”
United’s actions also drew a call from Sen. Ron Wyden, D-Ore., for the bill to be amended to prohibit top executives from taking large lump payments if their company’s pension plans are underfunded.
Although much of the bill is designed for protecting workers with defined benefit pension plans, there are also provisions for those with defined contribution plans. Under the bill, employees will have new diversification of stock in company pension plans, with the goal of avoiding another Enron fiasco.
“We need to ensure that employees have the right to diversify the investment of their savings,” said Sen. Max Baucus, D-Mont., the ranking member of the committee, in his opening remarks. “And we need to ensure that employees have the right to hold these savings in something other than the employer’s stock.”
Baucus also had praise for the bill’s handling of hybrid pension plans, which occur when an employer converts from a defined benefit to a defined contribution plan. The bill mandates protections to ensure that older workers are given their full compensation when their plans are shifted, and several legal challenges have arisen claiming that the use of such plans is age discrimination. Although noting that the transition can be “painful,” Baucus said hybrid plans are better suited for the more mobile workforce of current times and needed to be allowed.
“This bill, as modified by the chairman, makes it clear that the hybrid plan design is legitimate,” he said. “Equally important, we provide protections for older, loyal employees when a company desires that it must make the move from a traditional to a hybrid plan.”
Grassley agreed to make several adjustments to the bill to ensure its passage through as the Senate prepares to adjourn next week. However, the changes failed to assuage the concerns of the bill’s critics.
James Klein, president of the American Benefits Council, said the bill as approved, “still tracks quite closely to the administration’s proposal with which we have expressed a number of concerns.” Klein said the legislation does not resolve uncertainties in financing pension plans for employers and that he hoped other committees could provide a solution.
“It is our hope that the Senate Health, Education, Labor and Pensions Committee will also produce a bill on defined benefit pension matters and that that measure would provide more certainty for employers and more reasons to retain their defined benefit plan,” he said. If that occurred, he added, then changes also could be made as senators reconcile the two bills, and even then there will be further opportunities for change.
“Ultimately, whatever the Senate produces will need to be reconciled with what the House of Representatives produces,” he said.
Klein also noted that the pension bill could be tied together with proposed measures to reform the Social Security system as part of a broad retirement legislative package, or pulled out of that and put elsewhere if the Social Security reform effort falters.
“In either case,” he said, “pension legislation is likely to be considered late this year as part of a broader budget measure, rather than as a free-standing bill.”
Roger Sutton, president of the Association for Advanced Life Underwriting, said the bill “would ensure the continued viability of COLI as an important business planning tool that is used responsibly for the benefit of employers, employees and their families, and the general public.”