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November 01, 2009 at 02:00 AM
Congressional action on two key areas of retirement planning–defined benefit (DB) funding and investment advice–are expected to come by year-end, which is good news to those who say action is sorely needed.
Companies that sponsor traditional pension plans are still trying to overcome the huge jump in funding obligations resulting from the combined effects of the market losses in 2008, the tightened credit markets, and low interest rates, says Lynn Dudley, senior VP for policy at the American Benefits Council in Washington.
The House Ways and Means Committee held a hearing October 1 to figure out how to ease companies’ DB funding obligations. Those in the industry as well as Congress agree that “we have an emergency problem,” Dudley says. Congress has “to do something this year, otherwise we have to start laying people off.”
The market collapse in 2008 was not something that had been modeled during drafting of the Pension Protection Act of 2006 (PPA), which set out how funding obligations should be calculated. “When you have dramatic losses, you go to the credit markets and you buy the difference. Companies can’t go out and borrow the money for their pension plan because there isn’t that much liquidity in the credit market because of the financial crisis,” Dudley explains. “On top of that, interest rates are really low and that’s increasing our liabilities–the lower the interest rate, the higher the liabilities because you are using that to predict how much you’re going to earn in the future. So the combination is holding funding obligations at an exorbitant amount, in some cases a 650% increase.”
