Pension Relief Delay May Harm Private Plans

Recession and market declines create support for funding relief but Congress has yet to approve a bill.

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Many private pension plans are nervously awaiting Congressional action to give them more breathing room to adequately fund their plans. The Senate passed a relief version; the House has not. A House measure, however, may include provisions forcing employers to submit to increased government oversight of their compensation and some other financial practices. The Senate-passed bill did not include such measures and the odds of their being approved in that chamber are minuscule. It's possible the Labor Department can impose some of these oversight requirements under current authority but it probably would prefer to have any controversial rules imposed by lawmakers. Meanwhile, April 15 has come and gone. It marked a key funding date for pension contributions and requires public notices from pension plans that determined they were unable to make the contributions required under current rules.

[See U.S. News's list of the Best Mutual Funds for 2010, and use our Mutual Fund Score to find the best investments for you.] The logic for relief is evident. Assets of many plans were badly damaged by the stock market meltdown. This created funding shortfalls at the same time that employers were reeling from the steep recession. Money to help plans achieve financial soundness was either not available or would have had to come from funds that otherwise might be used to help the business recover and hire back employees.

Thirty million of us are still covered by traditional defined benefit pension plans. These are the "good" plans -- the ones that promise to pay fixed benefits to retirees for life. The newer breed of 401(k) retirement plans are defined contribution plans. Their retirement payments depend on the investment performance of the funds that have been contributed to the plans. Of course, they took a huge hit from the fall of 2007 to the spring of 2009, and they've still not fully recovered those losses (unless you add in new employee contributions, which inflates the plans' stated gains).

Under the Pension Protection Act of 2006, most private plans were given 7 years to make their plans whole if the annual evaluation of the plans' financial adequacy turned up any shortfalls. These terms were an improvement over the 5-year make-up provision of existing law. Now, under the most common relief proposals, employers and other plan sponsors would see even more favorable terms.

The proposals likely to be enacted would let plans choose one of two options. Under the first, known as "2 plus 7," plans would have two years' relief from funding shortfalls, although they would have to make interest payments on the shortfall amounts. After the two years have passed, they would then have seven years over which to spread their shortfall repayments. Under the second choice, pension plans would have 15 years over which to repay their shortfalls, and repayments would need to begin right away.

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Providing companies that much relief is, in effect, allowing them to push their funding problems into the future and avoid making tough decisions today. But with many companies still on shaky financial ground, there is concern that sticking to current rules will cause many companies to abandon their plans and saddle the government's Pension Benefit Guaranty Corp. with yet more taxpayer-funded pension obligations.

"Companies would be satisfied with either '2 plus 7' or the 15-year relief," says Judy Miller, chief of actuarial issues for the American Society of Pension Professionals & Actuaries. "It's a question of what strings are attached" to the plan that emerges from Congress.

In a letter last week to the chairs of key House committees, Labor Secretary Hilda Solis said, "(S)trict limits on funding relief should be applied to the extent that companies increase their dividend payments, make discretionary purchases of their own stock, or pay particularly high levels of executive compensation." Having government review compensation and other practices does not have support among pension plans, although Miller notes it does not have a large impact on most smaller employer plans.

Miller says she has heard that Congress intends to act on this measure before Memorial Day. But she's aware of the current legislative impasse, particularly in the Senate. One cautionary tale is provided by the estate tax, which Congress repeatedly said it would extend but which was allowed to lapse at the end of last year, and still has not been addressed. "There certainly is serious concern that nothing will get done this year."

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