Employer groups and an actuarial group say Congress should fine-tune the Pension Protection Act of 2006 and give them more time to comply with major provisions, such as changes in plan funding formulas.
The Health, Employment, Labor and Pensions Subcommittee of the U.S. House Education and Labor Committee today held a hearing on strengthening defined benefit pension plan protections.
Congress originally enacted the PPA in the wake of the scandals at Enron Corp., Houston, in an effort to encourage employers to do a better job of keeping the pension promises they have made to workers and to rely less on the backing of the Pension Benefit Guaranty Corp.
One of the witnesses was Sal Tripodi, president elect of the American Society of Pension Professionals & Actuaries, Arlington, Va., who called for the streamlining of PPA disclosure requirements and a number of more technical changes in the PPA.
Another witness was Scott Macey, director of government affairs for the consulting arm of Aon Corp., Chicago, who spoke on behalf of several groups, including the American Benefits Council, Washington, and the National Association of Manufacturers, Washington.
Employers already are fleeing from the defined benefit pension system, and the situation could get worse if the PPA forces employers to make big, unpredictable payments to fund defined benefit plans, Macey said according to a written version of this remarks.
The PPA funding rules now take effect in 2008, and Macey asked that the effective date be pushed back to 2009, to allow employers time digest and comment on the regulations needed to implement the new rules.
The PPA “funding reforms will have an enormous effect; the reforms will change the funding obligations of major employers by hundreds of millions of dollars, and in some cases billions,” Macey said.
“In the context of corporate planning, the 2008 effective date is drawing very close, and we have not yet seen proposed regulations regarding how the funding rules will work,” Macey said. “If the proposed regulations were issued today, the final rules could not be issued until late 2007. More than likely, final rules may not be issued in 2007, and sponsors will thus have to rely on temporary guidance.”
Moreover, because the U.S. Treasury Department is in a rush to create the regulations, it may leave “holes” to be filled at a later date, Macey said.
Macey also asked Congress to change the way the PPA pension plan funding targets will be phased in, to decrease the odds that one employer will have to contribute hundreds of millions of dollars more to its pension plan than will a similar company with slightly stronger plan funding levels.
Another topic Macey addressed was lump sum payments to plan participants.
To discourage weaker plans from using PBGC funds to offer unrealistically generous benefits to employees, the PPA prohibits underfunded defined benefit plans from paying lump-sum distributions in full.
A plan that is at least 60% funded but less than 80% funded can only pay half of a participant’s lump sum.
If a plan is less than 60% funded, no lump sum may be paid.
“This rule was clearly targeted at a serious problem area, but unfortunately the rule has a very significant problem,” Macey said. “The PPA requires after-the-fact notice to participants that a restriction on lump sums has taken effect. Many companies will be very uncomfortable only providing after-the-fact notice…. At least a very significant number of companies may feel that advance notice is appropriate from a fairness, employee relations, and/or fiduciary perspective.”
If an employer announces in advance that lump sums will no longer be available after a certain a point, “older, longer-service employees with large lump sums will retire in droves, creating an enormous drain on plan assets and a crippling brain drain for the company,” Macey said.
Congress could remedy the problem caused by the ban on lump-sum distributions by permitting moderately underfunded plans to offer lump-sum distributions, but they would have to make the permitted lump-sum distributions smaller than the lump-sum distributions healthy plans are allowed to pay out, Macey said.
This rule “is less likely than the current rule to produce the ‘rush to retire’ because the restriction is less severe,” Macey said.