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CCH® PENSION — 06/13/12

Employers and business groups urge Congress to adopt pension funding relief

Over 200 employers and trade associations, representing thousands of pension plans covering millions of employers, have signed a letter urging Congress to enact legislation to stabilize the pension funding interest rate rules. Similar actions have been urged by Mercer and by the American Society of Pension Professionals & Actuaries (ASPPA).

House-Senate conference

On March 14, 2012, the Senate passed a transportation authorization bill which included a provision aimed at stabilizing the interest rates used to calculate plan liabilities for pension funding purposes. Under the Senate bill, plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012 for purposes of the minimum funding rules, any segment rate would have to be within 10% (increasing to 30% in 2016 and thereafter) of the average of such segment rates for the 25-year period preceding the current year. This change would stabilize the fluctuation of interest rates from year to year, resulting in less decline when there is a sharp drop in interest rates and less of an increase when there is a sharp rise in interest rates.

The House passed a temporary transportation bill that did not include the pension funding reforms. This temporary measure was agreed to by the Senate and signed by the President on March 30, 2012. House-Senate conferees are meeting to negotiate a long-term transportation measure.

Effect of historically low interest rates

The employers and trade associations urged Congress to support "a permanent rule that disregards interest rates for any period to the extent that the rate for that period is not within 10 percent of the 25-year average interest rate." In addition, the employers’ letter also expressed support for other similar approaches, like lengthening the period for amortizing plan liabilities.

Without these recommended changes, funding requirements in the near-term will be far greater than necessary to meet long-term pension obligations, creating "significant economic inefficiencies and forcing employers to divert important resources to fulfill an artificial obligation," the letter stated.

In its letter to Congress, Mercer president and CEO Julio Portalatin said that "Mercer is concerned about the significant increase in pension funding requirements driven by historically low interest rates, which is causing many employers to divert capital from other parts of their business to their pension plans."

Portalatin expressed appreciation for the Senate approval of "inputs"-based reforms to temporarily stabilize pension discount rates and for its consideration of "outputs"-based reforms that seek to stabilize minimum required contributions rather than discount rates.

However, Portalatin said, to be effective, stabilization reforms must address both the increases in minimum required contributions and increases in contributions for funding to meet key Pension Protection Act (PPA) thresholds, such as the 80% threshold to avoid benefit restrictions, at-risk status, and PBGC 4010 filings.

"We therefore urge Congress to bear in mind that the issue is not whether stabilization reforms use inputs or outputs, but whether they stabilize minimum required contributions and appropriately address other PPA funding target thresholds that are crucial to employers," said Portalatin.

ASPPA executive director and CEO Brian H. Graff, in his letter to Congressional conferees, expressed support for modifying the funding rules to "adjust for artificially low interest rates, such as those we are currently experiencing.

Graff said that it is "critical" that the modifications to the funding requirements be adopted in time to be effective for 2012. "However, because we are already five months into 2012 and actuarial calculations for 2012 have already been completed for many plans, we ask that application of the modifications to 2012 be elective," Graff said. "Employers that can afford to make the contributions based on current interest rates may have already committed those amounts, and would prefer not to incur the additional expense of having the calculations redone," he added.

Source: Letter from employers, March 15, 2012; Mercer letter, May 21, 2012; ASPPA letter, May 23, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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