Members of Congress are still hashing through a compromise bill on pension reform, and completed, the final bill may also include a provision on abolishing the estate tax. Once again, Congress missed its mark to hammer out a compromise bill before the July 4 recess, but lawmakers “took some more baby steps” toward a resolution during the break, says Rick Lawson, VP of federal government relations at the Principal Financial Group.
One issue that’s had lawmakers stumped, Lawson says, is how to determine when a defined benefit plan is “at-risk.” The term Congress uses is “at-risk funding,” which signifies that a plan must step up funding. Congress has been debating whether to use a credit rating agency or a plan’s funding status to determine if a DB plan is at-risk. “If you use funding status, how do you define it?” Lawson says. Lawmakers have agreed, however, “they won’t be using credit ratings agencies anymore, just the funding status,” he says. The problem is, Lawson says, it’s hard to tell who agreed. “Is it just the Republican committee chairs? Does it include some of the Democrats who they’ve brought in?”
Another area where Congress is “making progress,” according to Lawson, relates to providing investment advice to plan participants, but it’s hard to tell exactly how. Mark Niziak, managing director of ERISA consulting at NYLIM Retirement Services, said during a recent conference call that plan sponsors are “reluctant to extend advice [to participants] for fear of liability,” but he believes an advice program “should reduce the risk of liability.” To encourage advice, “both the House and the Senate bills would provide that a plan sponsor will not be liable for advice extended assuming the plan sponsor has prudently selected and monitored the advisor,” he added. “Presumably, there would be a roadmap for the sponsor to follow.”
But the House and Senate bills differ in who can provide the advice. The Senate bill, the Pension Security and Transparency Act of 2005 (S. 1783), says it should be third-party advice, while the House bill, the Pension Protection Act of 2005 (H.R. 2830), says advisors to mutual funds could give advice with respect to their own funds. “This may constitute a prohibited transaction under current law, hence on the House side there is a class exemption that would accompany the House bill,” Niziak said. However, there is support for conflicted advice because “third-party advice can be very expensive and employers would not foot the bill–they would pass the cost along to participants,” he said, “and many participants wouldn’t pay the added cost for advice.”
Hybrid plans are “still under discussion with no resolution,” says Lawson, but “we’ve heard nothing for weeks” on the issue of using the yield curve to value pension liabilities “and what bonds are included or how they are weighted–that’s a major issue.” Whether or not a provision abolishing the estate tax will be included in the final bill depends on the day of the week, he says, but it does look possible. That means the bill introduced June 19 by House Ways and Means Committee chair Bill Thomas (R-California)–H.R. 5638, The Permanent Estate Tax Relief Act of 2006 (PETRA)–has a chance of getting tacked on to the pension reform bill. PETRA was passed by the House June 21.
Congress is trying to fashion “a final product that will attract sufficient votes,” Lawson says, “does putting the estate tax in the final bill attract votes?” he asks. Odds are low that Congress could hammer out a compromise bill before taking their month-long recess in August.