Fiscal talks could result in corporate pension funding relief

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Hoping: Lynn Dudley said chances are good because the proposals would raise tax reveunue.

Corporate defined benefit plan sponsors seeking long-term pension funding relief could reap the benefits of federal government leaders' search for more revenue in tense fiscal-cliff negotiations.

The pitch to extend or even make permanent the pension funding stabilization measures passed in the federal highway law, known as MAP-21, is part of an ambitious six-point proposal delivered to federal legislators and regulators Nov. 29 by the American Benefits Council, a Washington-based group representing Fortune 500 employers.

What could help the funding cause: Making the funding stabilization measures permanent could bring in as much as $70 billion in additional tax revenue at a time when Washington is looking for more. The $70 billion figure is based on several estimates by trade groups from the first round of funding relief.

Lynn Dudley, American Benefits Council senior vice president, policy, said in an interview that many of her group's members would appreciate more support for the defined benefit pension system, but they are particularly concerned about the size of their pension funding liabilities in a low-interest-rate environment that will continue at least until 2015, according to the Federal Reserve Board.

“I'm not sure that Republicans and Democrats understand the pressure on plan sponsors,” said one ABC member, a lobbyist for a company with a $6 billion defined benefit plan facing a ballooning contribution next year. “What is our incentive to stay in the game?”

The pension funding rules in the highway law enacted July 6 allow DB plans to temporarily use a rate within 10% of the 25-year average corporate bond rate for calculating their pension funding obligations, which in turn would reduce tax-exempt contributions and boost federal tax revenues by an estimated $9 billion over 10 years. The interest-rate relief diminishes annually until effectively ending in 2016. MAP-21 also raised another $9 billion in increased premiums for the PBGC.

$100 billion in savings

According to an estimate by Mercer, the current rate relief could save plan sponsors as much as $100 billion through 2014. Labor organizations signed on to the highway bill provisions because freeing up the cash could allow companies to expand and hire more people.

Some members of Congress were hesitant to grant pension funding relief during the debate over the highway bill, but the amount of revenue raised through the funding relief to pay for the highway bill won the day.

Now, the fiscal cliff presents a “bigger deadline and a bigger hole to fill. If you raise revenue, you're in play,” said the lobbyist. Before MAP-21, “we would have had to consider drastic steps, and our employees would lose.” With the Fed keeping rates low through 2015, “at least make those two parts match up,” he said.

“I think that we have a very good shot to the extent that revenue is needed,” Ms. Dudley said. It is also a practical solution, she noted, “because Congress wrote MAP-21 so it can be dialed up or dialed down. They knew they would have to come back to it.”

But even if Congress is persuaded to allow higher rates for longer periods of time, R. Evan Inglis, principal and chief actuary with The Vanguard Group Inc., investment strategy group, Valley Forge, Pa., isn't sure how many plans would — or should — use them.

Using higher rates to value liabilities lets sponsors make fewer contributions — for a while — which “covers up risk and makes it hard to manage,” Mr. Inglis said in an interview. “Even if it will have felt good for a while, you will have given up returns from long bonds, and eventually you have to put the money back in.” While the extra cash could be useful for other investments, “you can't change the ultimate cost of the plan” and it doesn't change accounting rules, which are based on current market rates.

“You can lessen the pain for a little bit, but in the end, the pension plan's going to cost what it costs,” Mr. Inglis said.

While the MAP-21 proposal leads the benefits council's six-point plan, other recommendations it makes are:

  • delaying premium increases sought by the Pension Benefit Guaranty Corp. until Congress can review its long-term financial needs;
  • clarifying 4062(e) rules so additional contributions are not required when businesses contract;
  • simplifying Internal Revenue Service non-discrimination testing rules for frozen pension plans;
  • ensuring that upcoming IRS hybrid-plan regulations are not retroactive; and
  • asking accounting standards officials at the Financial Accounting Standards Board to allow the use of the longer-term corporate interest rates, if approved by Congress, to calculate plan liabilities, and for the Securities and Exchange Commission to allow that change.

The council wants Congress to hold off on the PBGC's request for additional premiums until the agency's finances are scrutinized. “Higher premiums have been a catalyst to driving people out of the system, and that shrinks the PBGC's premium base. It's going to become a vicious cycle,” Kent Mason, outside counsel for ABC with Washington law firm Davis & Harman LLP, said in an interview. “We want Congress to do a study of their true financial condition first.”

PBGC standing firm

That isn't likely to happen, said PBGC Director Joshua Gotbaum, who cited a Nov. 8 Government Accountability Office study recommending that Congress allow the agency to revise its premium structure.

“I'm sorry ABC is still fighting the last war. Congress knows that PBGC's finances need to be shored up and GAO recognizes that premium reform is the way to do it,” Mr. Gotbaum said in an e-mail. Supporters of PBGC premium increases note that MAP-21 negotiators raised premiums by “only” $9 billion, far short of the agency's $16 billion fiscal year 2013 request.

Mr. Gotbaum also dismisses the ABC plan's call for restricting the 4062(e) rules on the argument that the law was aimed at only complete plant shutdowns. “We take the mandate to reduce burdens on DB plans seriously and we've just eliminated 92% of all plans and sponsors from 4062(e) enforcement,” Mr. Gotbaum said. “Can any other federal agency say that?”

IRS officials declined to comment on two of the plan's points under their purview.

One, which calls for allowing closed plans to continue to cover grandfathered employees without violating non-discrimination testing rules, “is something that's hitting pension plans now, and it's keeping people out,” said Mr. Mason of Davis & Harmon. Legislation to enact the changes was introduced in February by Rep. Richard Neal, D-Mass., but it would have to be reintroduced in the new Congress because it never advanced in the old Congress.

The other IRS action item on ABC's list is final regulations for hybrid plans “that are clear and allow people a safe way to get their plans into compliance,” said Mr. Mason, who notes that the number of hybrid plans is increasing as active defined benefit plans are dropping.

FASB spokesman John Pappas declined to comment on the specific proposal, but he said that officials will meet in the first quarter of 2013 to decide which pension issues it will consider next year.

Members of Congress — including House Education and the Workforce Committee Chairman John Kline, R-Minn., and Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa — declined to comment on the proposed changes. For now, all eyes are on the fiscal cliff.

This article originally appeared in the December 10, 2012 print issue as, "Fiscal talks could result in funding relief".