While pension experts say the recently passed Pension Protection Act of 2006 will indeed help remedy the funding problems that have plagued defined benefit (DB) pension plans, they doubt that it will resolve the insolvency woes of the Pension Benefit Guarantee Corporation (PBGC).
The legislation–which President Bush signed into law August 17–”does take good steps” to deal with pension plans’ funding, says Alex Pollock of the American Enterprise Institute, by first raising the funding target of pension liabilities to 100%–giving companies seven years to hit that mark.
The law also increases the variable premium for underfunded plans, and prohibits severely underfunded ones from increasing benefit formulas. A fee of $1,250/participant would be levied on companies that terminate their plans.
The new law “takes a number of steps which would ameliorate the finances of the PBGC, but all of that doesn’t appear to be enough to solve the insolvency,” Pollock says. “It also doesn’t address the real fundamental structural problem of the PBGC, which is you have the government guaranteeing other people’s risk decisions, which is almost certain to lead to problems.” He believes that Congress will need to enact further changes to address the PBGC’s structural problems, which includes how to deal with the fact that people are living longer.
Former SEC Chairman Arthur Levitt agrees that the bill is a step in the right direction, but says it’s “certainly not a cure for what ails the pension system.” Besides the fact that implementing the bill will take a “long transition period,” he sees trouble looming for those companies that will see their contributions more than double. How will these companies respond? “More companies will go into debt to fund their plans, or they may allocate their investments differently to protect the plans’ funded status,” he says. Moreover, if interest rates continue to creep up, “some companies may close their plans.”–Melanie Waddell