House Ways and Means Committee Holds Pension Funding Hearing
October 2, 2009
On Oct. 1, the House Ways and Means Committee, led by Chairman Charles Rangel (D-N.Y.), explored an issue that could pose a significant problem impacting the retirement benefits for millions of Americans: the funding shortfalls experienced by a number of pension plans and the need for the federal government to relax the requirements on funding levels. It’s a move that experts testifying before the committee said will save jobs and assist economic recovery.
The committee hearing comes on the heals of a special edition of the Employee Plans News issued by the Internal Revenue Service on Sept. 25 that included information on impending funding regulations. In addition to stating that the regulations will be issued “in the near future,” it also provided further guidance on determining the adjusted funding target attainment percentage (AFTAP). Specifically, the IRS concluded that a plan with a Jan. 1, 2009 valuation date could use the lower monthly yield curves from any of the four months immediately proceeding January 2009 and change the valuation in 2010 and after. The guidance also said that all of this could be done without having to wait for IRS approval. This move is expected to help assist pension plans achieve a smoothed valuation rate and provide more predictability.
During the Ways and Means hearing, Members of Congress heard from pension experts, who explained that pension plans are dealing with the stricter funding requirements just coming into effect created under the Pension Protection Act (PPA) of 2006 and the economic crisis. Each of these occurrences has meant that many pension plans are on the wrong side of a one-two punch leading to what some experts say will be a worldwide pension funding status level of 84 percent (it is important to remember that the restrictions on pension plans created in the PPA kick in at the 80 percent funding threshold).
The U.S. government has already assisted pension plans with the passage of the Worker, Retiree and Employer Recovery Act of 2008, which was signed into law by President Bush in December of last year and allowed for the smoothing of assets. Pension plans were also helped in March when, for the first time, the IRS decided to allow flexibility when selecting yield curves. However, a tremendous amount of uncertainty still remains, which is why some Members of Congress are supporting additional relief for pension plans.
Specifically, Rep. Earl Pomeroy (D-N.D.) introduced draft legislation in August that attempts to provide pension funding relief by allowing plans to make interest-only payments for two years on 2008 losses and provide plans seven years to amortize their shortfalls. Pomeroy’s measure would also provide plans more predictability by allowing for 24-month smoothing of assets within 20 percent of their fair market value. The House Education and Labor Committee and Minority Leader John Boehner (R-Ohio) have also introduced pension funding relief bills that provide the similar relief found in Pomeroy’s legislation.
One provision in the Pomeroy plan that has caught the attention of businesses is a maintenance of effort (MOE) requirement aimed at employers accepting funding relief. According to the Pomeroy plan, employers would have to satisfy one of three options, including:
Ø The continuation of making benefit accruals;
Ø The option to make a 3 percent contribution to a defined contribution plan for employees frozen out of the defined benefit plan; or
Ø The freezing of nonqualified plans for company executives and providing them the same restrictions seen by the defined benefit plans held by employees.
A timeline for legislative action has not been set. Considering that the Senate is clearly bogged down by the health-care debate and that health care will remain at the top of the Democratic agenda, a timeline for pension funding relief is difficult to ascertain.
Prepared Oct. 2, 2009, by Chris Graham (email@example.com), Associate Manager, Government Affairs, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.