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Hopes Rise For Passage Of Long-Sought Pension Bill

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The Senate was scheduled to vote Aug. 4 on legislation long sought by the insurance industry that contains provisions that one insurance analyst said “represent a watershed opportunity for the U.S. life industry” and “could trigger an unparalleled period of sales and earnings growth.”

The comments by Colin Devine of Citigroup are about H.R. 4, a bill designed to shore up private pensions and the agency that backs them, the Pension Benefit Guaranty Corp., but which contains a host of provisions that will add to and enhance the industry’s product offerings.

However, Michael Kerley, senior vice president, federal government relations, at the National Association of Insurance and Financial Advisors, Falls Church, Va., remained cautious at press time.

“Nobody knows for sure except Senate Majority Leader Bill Frist how the procedure will unfold, but there is growing confidence that the pension package will pass the Senate,” he said.

Assuming there are no amendments to the bill, Kerley said, Senate passage means it will become law because the House passed the bill July 28.

“That would imply that there would be no amendments offered to the bill, but we know that a number of senators have concerns over various aspects of the pension issues,” Kerley said. “For example, not all airlines are treated the same. And that is important to Texas senators, for example.”

Assuming passage, two provisions included in the bill are industry priorities. One removes some of the barriers to providing investment advice to members of defined contribution plans such as 401(k)s administered by insurance companies that agents represent, and another adds a long term care rider to annuities.

While officials of NAIFA supported the investment advice provisions–especially one that dealt with providing on-site advice to members of defined contribution plans–some insurance industry officials were voicing concern about the language, implying the industry might seek clarification of the provision.

There was also support for what the bill doesn’t contain. “We were pleased to see the House change the Senate’s investor-owned life insurance (IOLI) proposal from an outright tax on life insurance into a two-year study of the issue,” Kerley said. “We hope to work with the Treasury Department and the congressional tax writers to come up with an effective answer to the IOLI challenge.”

The bill’s passage was tortured, especially over the last several weeks as the House Republican leadership and Sen. Frist sought to hitch it up with passage of estate tax reform legislation.

But early in the week of July 31, the Senate leadership agreed to take up H.R. 4, shorn of tax cut provisions known as “extenders,” after first dealing with a complex package of bills put together into H.R. 5970. That bill includes provisions eliminating the estate tax for most families; raising the minimum wage; extending the tax cut provisions; and adding myriad other provisions designed to gain the votes of wavering Democrats.

While the insurance industry opposes the estate tax provisions, it strongly supports the pension reform bill.

Among the provisions in the bill is one that codifies the tax treatment of corporate-owned life insurance (COLI) and establishes a best practices process for the sale of the product. The industry has lobbied for these provisions for several years.

Some of the provisions included in the bill supported by the industry include automatic enrollment in 401(k) plans; allowing insurers to offer a long term care rider to annuities; loosening some of the restrictions on agents offering investment advice to members of 401(k) plan companies they work for administer; and clarifying the “safest-available annuity standard.” The automatic enrollment provision contrasts with current practice, which requires employees to opt in to 401(k) plans.

The safest available annuity provision is “significant,” according to officials at the American Council of Life Insurers, “because it will encourage more employers to offer an annuity as a settlement option at retirement.”

The bill would also make permanent the pension and retirement benefit enhancements contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

At the same time, a provision that would allow holders of Flexible Spending Accounts to roll over up to $500 annually was not included. A lobbyist for an industry trade group said members of the conference committee that drafted the plan ultimately found it too expensive.

Investment advice, the subject of much debate between Senate and House conferees on the bill, ultimately turned out to be a “positive development” acceptable to NAIFA, Kerley said.

The provision creates an exemption from ERISA’s prohibited transaction rule for investment advice provided to employer-sponsored retirement plans through a computer model certified by an independent party, or a company model audited and certified by an outside party.

But a second part of the provision allows advisors to provide on-site advice if the compensation does not vary with the investments selected.

“This is a provision which NAIFA has been advocating for many years, but the technical language is not completely clear so we’re not popping any champagne corks,” Kerley said. The ultimate value of the provision may have to await publication of regulations that clarify its utility, he said.

The provision allowing an LTC rider to annuities “is an extremely valuable tool for individual long-term security planning,” Kerley said. “It means that people who buy annuities in their early years will have the option of using those policies to underwrite the cost of LTC if need be. This makes life insurance and annuities much more flexible financial vehicles over a person’s lifetime.”


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