Senate Pension Reform Bill Approved
In a prepared statement, Bill Thomas, Chairman of the House Ways and Means Committee said, “Pensions obviously are a critical component of retirement security for millions of Americans, providing an important source of income for retirees. However, outdated pension funding laws and structures have threatened the financial stability of many of these plans and allowed some employers to dramatically underfund their promised obligations to their employees.”
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The Senate bill strengthens several corporate pension requirements. Pension benefits are required to be calculated more transparently to avoid distortions. The bill legislates an increase in insurance premiums to the Pension Benefit Guaranty Corporation (PBGC). It also requires any company filing for Chapter 11 bankruptcy protection to pay an additional fee to the PBGC, terminate their pension plans, and then come out of bankruptcy. Annual reporting of pension fund strength to employees would also be required.
Any pension funding gaps are required to be corrected within seven years for most companies and up to 20 years for financially ailing major airlines. The New York Times reported that this provision was deemed particularly inadequate by the White House because of built-in delays. Built-in loopholes were also a concern.
One concern is the way companies currently calculate pension benefits. Most companies calculate benefits as if all their workers were the same age instead of calculating on their proper ages called the yield curve method. The current method understates benefits. Those approaching retirement age should be especially concerned that their retirement funds will not be compounding for very much time before their benefits begin coming due. Companies have said that calculating benefits using the yield curve method would be unacceptably complicated.
Another area corrected by the Senate bill was lump-sum distributions. Currently companies paying benefits in a large single check can write those checks even if their funds are running out of money. This occurred at Delta Air Lines recently according to the New York Times. The Senate legislation would require companies to stop paying lump-sum distributions when their fund assets fell below 60 percent of total pension obligations. The White House was seeking an 80 percent limit on lump-sum payouts.
Business executives have warned that they would stop offering pension funds if companies had to put unreasonable amounts of cash into their pension funds according to the New York Times. Organized labor has sided with business leaders on this issue.
The PBGC has made several studies of the Senate and House legislation and found the bills to be inadequate. The study found that companies under the Senate bill would be putting 8 percent less into their pension funds than if no changes were made to the current law according to the New York Times. The study also found that companies would save $21 billion in pension contributions in 2006 alone. Their total savings over the next 10 years would be $70 billion.
In addition, the Financial Times reports that changes in U.S pension fund accounting may prompt an investment shift away from equities and toward bonds. The Financial Accounting Standards Board proposes that defined benefit pension funds stop “smoothing” their fund performance and report actual performance annually. Funds would be forced to invest in fixed income bonds to limit risks. Pension fund returns would also be included in corporate quarterly earnings statements.