Defined Benefit Pension Plans

 

As the Baby Boom generation begins to retire, it is increasingly important to ensure the strength of the private retirement plan system.  Millions of retired Americans rely on private pensions and employer-sponsored retirement savings as their most important source of income after Social Security. In an era where life expectancy has increased dramatically, it is more important than ever that policymakers foster the growth of employer-sponsored retirement plans.

 

Defined benefit plans are employer-provided retirement plans that provide a guaranteed retirement income.  In these plans, the employer assumes all of the investment risk and the benefits are guaranteed by the Pension Benefit Guaranty Corporation.

 

After six months of conference negotiations, Congress passed the Pension Protection Act of 2006.  The Senate passed by the bill by a vote of 93 – 5 on August 3, 2006 and the House passed the bill by a vote of 279 – 131 on July 28, 2006.The president signed the bill into law on August 17, 2006.

 

The Act fundamentally changes the current funding rules by eliminating the current funding system and replacing it with new funding targets, a new interest rate assumption based upon a modified yield curve formula and a new at-risk liability category. In addition, the proposals include in various forms reforms to credit balance rules, disclosure requirements, multiemployer funding, and hybrid plan issues.  The Act is a significant improvement over the Administration's proposal that was offered in January which would have been based on a pure yield curve formula with a spot interest rate, eliminated credit balances, and required companies below investment grade to make higher contributions.

 

In addition, the Deficit Reduction Act of 2005 included increases to PBGC premiums.  Beginning in 2006, the flat-rate single-employer premiums increase from $19/participant to $30/participant and are indexed to wages thereafter.  Moreover, there is  a $1250/participant termination premium for companies that reorganize under Federal bankruptcy laws.

 

Throughout 2005 and 2006, the Chamber worked to educate Congress and the Administration on the need for reasonable and rational funding rules that support the defined benefit pension system.  In January of 2005, the National Chamber Foundation co-sponsored a pension reform retreat for Capitol Hill staff.  Following the retreat, the Chamber kicked off the formation of a broad business community pension coalition, The Pension Coalition, on February 17, and has been an active member of the Coalition's Steering Committee.  Also, the Chamber jointly testified before several Congressional hearings on pension reform legislation and Lynn Franzoi, Chair of the Chamber Pension Subcommittee and Senior VP for Fox Entertainment, testified before the House Committee on Education and the Workforce hearing regarding H.R. 2830, the Pension Protection Act of 2005 on June 15. 

 

The pension reform debate began with the need to replace the interest rate assumption for the determination of pension liabilities.   On October 31, 2001, following a three-year program of buying back 30-year bonds, the Treasury Department announced that it would cease issuing the bonds.  As a temporary fix, the Job Creation and Worker Assistance Act of 2002 (PL 107-147) increased the range of permissible interest rates for determining contributions and PBGC premiums for under-funded pension plans to 120% of the current 30-year Treasury rate. However, the temporary remedy expired on December 31, 2003.  On April 9, 2004 Congress passed H.R. 3108, the Pension Funding Equity Act of 2004,  which replaced the 30-year Treasury bond interest rate assumption with a composite of long-term corporate bond rates for the years 2004 and 2005.  In addition, H.R. 3108 provided limited relief to the airline and steel industries from the deficit reduction contribution and provides narrowly-targeted relief to certain underfunded multiemployer pension plans.

 

 

The US Chamber believes that changes in funding rules should be rational and reasonable.  While the Pension Protection Act of 2006 does not fully address our concerns, there is consensus that it represents a balanced compromise between the positions of the Administration and the business community.  Moreover, we will continue as we work on issues of concern to our members as we address any technical corrections bills and the numerous regulations from the Treasury Department and the Department of Labor.