Blogging Employee Benefits

March 8, 2006

Treasury Official Reiterates Pension Reform Demands

Filed under: Legislation, Pensions, Retirement Policy — Fuguerre @ 7:43 am

While many companies act in good faith to fund their pensions, the law unfortunately allows employers to comply with pension rules technically without adequately funding the pension promises they make.

Bush Administration threats to use its first veto not against port policy, but against compromise pension reform, were thick in the air of remarks delivered Tuesday to the DC Bar by Assistant Treasury Secretary Mark Warshawsky. [JS-4098] While the clear majority of remaining defined benefit plan sponsors do not receive adequate respect for adequately funding their employees’ pensions, unfortunately the entire universe of plans face unnecessary funding increases and volatility in a blunt, crisis-mentality attempt to get to the minority that pose the risk to the PBGC. As the pension legislation moves to conference, major points where the Administration still wants to tighten the screws –

  • Phase-In Periods – The Administration wants new rules to be immediately effective for plan years beginning on or after January 1, 2007, with no transition.
  • Measurement of Pension Assets and Liabilities – The Administration continues to press for limiting asset-smoothing periods to twelve months, arguing that the proposed reduction of amortization periods to seven years will still allow sufficient dampening of contribution volatility. And although investment in investment-grade corporate bonds would not inherently violate ERISA standards, the Administration continues to press for building a conservative margin into the valuation of pension liabilities by looking for the yield curve to be drawn only from high-quality bonds.
  • Mortality Assumptions – No longer comfortable with ERISA’s “best estimate” standard for assumptions, the Administration opposes permitting companies to base measurements on mortality assumptions that reflect realistic expectations for specific groups, proposing instead to take projected improvements in mortality into account in advance.
  • Credit-Based Targeting – Although the Administration’s pension funding reform scheme would raise the bar for all to cure the sins of the few, the Administration continues to press further to link pension funding levels with a company’s credit rating.
  • Credit Balances – The Administration suggests that there are more efficient ways to encourage funding above minimum levels without providing details and claims “dangerous double counting of pension assets” without demonstrating the mathematical reality. If the Administration gets its way on credit balances and FASB continues on course with changes that will eliminate the effect of advance contributions on shareholder equity, don’t expect any pension plan to fund beyond the rock-bottom minimum past 2005.
  • Industry-Specific Relief – In the end, the Administration may draw its hardest veto line at any conference committee compromise that includes special rules such as a Senate amendment granting higher early retirement benefit guarantees for airline pilots.

Warshawsky’s comments did not touch on one other major culprit of pension underfunding tagged by the Economic Report of the President: traditional pension funding policy under present ERISA standards of prudence.

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