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U.S. Master™ Pension Guide, 2009 Edition
Revised for 2009 to include relevant provisions of the Heroes Earnings Assistance Relief Tax (HEART) Act and the Emergency Economic Stabilization Act.
The Pension Security and Transparency Bill of 2005 (S. 1783), passed by the Senate on November 15, 2005, is a massive piece of legislation that would not only reform the pension funding rules but would make major changes affecting defined contribution plans and ERISA fiduciary rules. The bill, which passed on a vote of 97 to 2, is a modified version of legislation that had been agreed to by the Senate Finance and HELP Committees in late September (see CCH Pension Plan Guide Newsletter, Report No. 1600, October 3, 2005). The measure was further amended on the floor to include controversial provisions designed to provide special funding relief for airlines. It does not appear that the legislation will have an easy path to enactment. The House is expected to act on its pension proposal, the Pension Protection Bill (H.R. 2830, see CCH Pension Plan Guide ¶29,140), in December. The House bill differs significantly from the Senate measure and does not contain the controversial airline relief. Further complicating the situation, the White House has issued a statement criticizing aspects of the Senate bill and threatened a veto if the bill is not changed in conference.
The swift action by the Senate was made possible when two Senators released their "hold" on the bill. Sens. Barbara A. Mikulski (D-MD) and Mike DeWine (R-OH), had held up Senate action over two provisions in the legislation regarding the use of credit ratings and "smoothing," the process of averaging out fluctuations in pension contributions from year to year. On the Senate floor, Mikulski told lawmakers that she and DeWine would not offer an amendment addressing their concerns; instead they would work in conference negotiations to make changes. "It is imperative that we pass comprehensive pension reform," said Mikulski. "There are too many other good provisions in this bill."
Some of the major provisions in the Senate bill include the following:
Companies would be required to contribute more to their pension plans, aiming for 100% funding. The bill adopts a funding calculation using a modified corporate bond yield curve.
Certain companies that are junk bond-rated would be required to make additional payments to their pension plans to cover additional costs like increases in subsidized early retirement benefits. The bill provides exceptions for companies whose credit ratings are stable or improving, as well as additional exceptions for companies with well-funded pension plans.
Increases in benefits or accruals of future benefits (and lump-sum payments) would be limited when plans become underfunded.
PBGC premiums would be increased, beginning in 2006, from $19 to $30 per participant. A premium of $1,250 per participant would be added for plans terminated in bankruptcy payable for three years after exiting bankruptcy.
Within 90 days of the end of each plan year, employers would be required to provide workers and retirees with a report disclosing the funded status of their pension plan and comparing its condition to the previous two years. In addition, the bill greatly expands the information multiemployer and single-employer pension plans must report, including data on financial status, investments, number of participating workers and retirees, and other information important to understanding the health of a pension plan.
The bill provides guidance upholding the legality of cash balance plans. Protections are granted to older workers in cash balance plan conversions. Note, however, that the cash balance provisions would be applied on a prospective basis only and would not address prior conversions.
Individuals harmed by the Enron bankruptcy, or a similar situation, would be allowed to make additional contributions to their retirement accounts for five years.
Employees would be provided with access to independent investment advice.
Limited exceptions would be provided from ERISA's conflict of interest rules to allow pension and health plans to engage in certain types of transactions, such as block-trades, trades on Electronic Communication Networks and foreign exchanges transactions, when certain required safeguards are in place.
New rules would be provided to encourage employers to adopt an automatic enrollment feature in their 401(k) plans.
Two provisions granting special relief to airlines were adopted as floor amendments. One amendment, sponsored by Sen. Johnny Isakson (R-GA) would provide a 20-year period for plans maintained by commercial airlines to amortize their pension liabilities. The original bill provided a 14-year amortization period for airlines. Lawmakers also approved an amendment offered by Sen. Daniel Akaka (D-HI) that would adjust monthly pension payments for airline pilots when they retire at age 60, as required by the Federal Aviation Administration (FAA).
As we noted last week, the Bush administration said that it supports the Senate bill but believes that reforms in the legislation remain inadequate with respect to the level of required plan contributions and the premiums that are needed to return the PBGC to solvency and avert a taxpayer bailout. A Statement of Administration Policy released on November 16, 2005, stated that the President’s senior advisors will recommend a veto if the net effect of the conference report is to weaken funding requirements for pension plans relative to current law, the policy statement said.
The House is expected to take up H.R. 2830 in December. The House Ways and Means Committee approved the pension reform legislation on November 9 by a vote of 23 to 17.
"The Senate vote represents another important step toward enacting the first comprehensive reforms to the traditional worker pension system in more than a generation," said House Education and the Workforce Committee Chairman John A. Boehner (R-OH) in a written statement. Ways and Means member Benjamin L. Cardin (D-MD) told CCH that there is a lot of interest among lawmakers in getting pension reform enacted. He said the House will likely pass H.R. 2830, but the bill's provisions might not generate much support in the Senate. He predicted that a compromise will be reached with Senate lawmakers, but it will be difficult. On the issue of timing, Cardin speculated that it might be 2006 before a final conference report is passed by the House and Senate and the measure goes to the President's desk.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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