WASHINGTON - Despite the last-minute efforts of the Pension Benefit Guaranty Corp., the Clinton administration's pension reform legislation is likely to face major revisions in the House.
While the bill originally was designed to be revenue neutral, an administration source said the legislation could generate between $500 million and $1 billion over five years.
Randall Johnson, director of benefits planning at Motorola Inc., Schaumburg, Ill., testified at a hearing last week that, under the bill as it stands now, the combined mandated mortality and interest rates would raise liabilities as high as 20% over current company estimates.
James Durfee, director of actuarial practice at Towers Perrin, Valhalla, N.Y., said: "We see no reason why the bill should impose one mortality table on all plans when there can be no question that there is a range of reasonable mortality assumptions, depending on the group. The net effect of the proposal is to create, on paper, increased liabilities which do not actually exist, diverting corporate resources from capital improvements to unnecessary funding for already well-funded plans."
Industry representatives who say they support improvements to current funding standards have specific proposals to amend the legislation. The most likely changes:
Eliminating the mandated assumptions for mortality and interest rates.
Deleting from the bill new enforcement powers for the PBGC.
Eliminating or adopting a consensus on rules relating to cross-testing for age- and service-weighted defined contribution plans.
If the bill does not get amended to change specific provisions, three Washington interest groups - the Financial Executives Institute, the ERISA Industry Committee and the Association of Private Pension and Welfare Plans - will oppose it, said Gina Mitchell, director of government relations of the FEI.
"The business community does not want a bill to go through with this much volatility," said Mark Ugoretz, ERIC's president. "The major problem with this bill is that it is not geared to fund pension plans, it is geared to fund the PBGC."
Rep. Sander Levin, D-Mich., is leading efforts to change the mortality and interest rate provision and the PBGC's enforcement powers. Rep. Wally Herger, R-Calif., is expected to introduce an amendment to change the cross-testing provision.
Meanwhile in a move some believe was designed to gain support and publicity for the bill, the PBGC two weeks ago terminated three pension plans in one week, totaling $45 million in underfunding, affecting 6,000 workers and retirees.
In addition, the PBGC announced an agreement with Harvard Industries, Union, N.J., in which Harvard would make, in addition to its regular annual contribution, a $24 million contribution over three years to its pension plan, which is underfunded by $24.6 million.
In each notice of the terminations and the funding agreement with Harvard, the PBGC cited the pending legislation aimed at putting underfunded plans on a faster funding schedule.
"Promises are being broken and people are being hurt," said PBGC Executive Director Martin Slate at a House Education and Labor subcommittee hearing last week.
Frank McArdle, a consultant at Hewitt Associates, Washington said: "The PBGC is still using publicity to try and move the legislation."
The Retirement Protection Act of 1993 (H.R. 3396) would change the funding schedules for underfunded defined benefit plans, lift a cap underfunded plans pay in premiums to the PBGC, enhance the PBGC's ability to prevent companies from reneging on pension promises, and broaden employer plan disclosure requirements to participants.
The bill was expected to be considered by the House Ways and Means Committee late last week. The House Education and Labor Committee is expected to consider the bill within the next few weeks.
Pension specialists claim the bill will have a negative impact on well-funded pension plans. For example, the bill would require all defined benefit pension plans to use a standard interest rate assumption and mortality table to determine a plan's liability. This would speed up funding for underfunded plans, but it could affect well-funded plans too, experts said.
Speaking at last week's hearing, Mr. Slate defended the bill and said the purpose is to ensure plans are able to pay benefits. In addition, the mortality table the bill proposes mirrors what most states use to calculate insurance company reserves for annuities, he said.
"What we're talking about is that we want to fund plans," Mr. Slate said at the hearing. "We felt that companies have too much flexibility with actuarial assumptions."
Labor Secretary Robert Reich said this flexibility has added to the underfunding of pension plans. Underfunding has almost doubled, from $27 billion in 1987 to $53 billion in 1992. Eight million people participate in underfunded pension plans, he said. What's more, the PBGC's deficit, for its single and multiemployer plans, is at $2.6 billion.
"So long as chronic underfunding persists, however, the long-term health of the nation's pension system - and the insurance program that protects it - is uncertain," Mr. Reich said at the hearing.
Mr. Reich cited Sharon Steel Co., Sharon, Pa., as an example of what can happen to participants of an underfunded plan when it terminates.
In 1993, the PBGC terminated Sharon Steel's five plans, which were underfunded by $250 million. About 1,200 participants lost part of their benefits because of limits on the PBGC guarantee.
Also controversial are proposed new powers the bill, as it stands now, would give the PBGC to prevent companies from walking away from pension promises. The PBGC would like advance notice of transactions and other events of certain companies that may threaten the companies' pension plans' funding or viability.
Mr. Slate said the agency's only defense in saving pension benefits is to terminate the pension fund.
In the case of a control group where one member of the group leaves, or a company that sells off a subsidiary, the agency might be able to prevent a plan termination by imposing pension funding requirements prior to the business transaction.
"We want to protect benefits, not hobble corporate transactions," Mr. Slate said.
While the United Auto Workers union has stated it supports giving the agency the ability to receive advance notice of these business transactions that would affect pension funds, other industry specialists said the PBGC would use this tool like a wedge: if companies don't agree to the agency's terms, it could still seek an involuntary termination.
The third provision likely to be debated in the House committees concerns a provision that would nearly wipe out cross-testing, a specific method that allows age- or service-weighted defined contribution plans to test for non-discrimination.
Mr. Herger, who serves on the Ways and Means Committee, plans to introduce an amendment that would change this provision, a staff member said, but cannot until the administration is more clear on how it would like to see the proposal changed.
Since the legislation was introduced last fall, the Clinton administration has received proposals from various interest groups to revise this provision. Administration officials have been open to changing the provision, but haven't settled on a final proposal.