WASHINGTON - Congress is on the verge of acting on sweeping pension legislation, arguably the most significant since 1987.
The new bill strengthens funding formulas for plans that are less than 60% funded. It also lifts the ceiling on the variable rate premium and requires underfunded plans to keep liquid assets that would equal three years' worth of benefit payments.
The 1987 law tightened funding for plans that are less than 35% funded; it also created the variable rate premium ceiling of $53 per participant.
The reform package - once known as the Retirement Protection Act of 1994, (H.R. 3396) - has been attached to the General Agreement on Tariffs and Trade, and is expected to go to the House and Senate floors for a vote soon.
But at press time, Senate Commerce Committee Chairman Ernest Hollings, D-S.C., threatened to block the bill from getting out of his committee.
"Clearly, the negotiations have yielded a product that is much better than what we started out with," said Chris Bowlin, senior associate director for employer benefits at the National Association of Manufacturers, Washington.
The negotiations to which he was referring were done as part of the pension package attached to the trade bill. Mr. Bowlin and other sources said that unless changes were made to the pension reform package, some companies would have been forced to oppose the overall GATT legislation.
"We don't think that a fast-track bill is the place to put pension policy, but (now) this bill is not going to get in the way of our support for GATT," Mr. Bowlin said.
Business community members, congressional staffers and administration representatives made a number of concessions to fashion a bill to keep the intent of putting underfunded pension plans on a faster funding schedule. All sides agree the current package is an acceptable compromise.
"The reforms are moving forward," said Martin Slate, executive director of the Pension Benefit Guaranty Corp. "Strengthening pensions through better funding will better the system as a whole. Companies can have greater confidence in a stronger pension system and a stronger PBGC."
If the bill is passed, it would generate $1 billion over five years for the GATT. In addition, the bill would eliminate the PBGC's $2.6 billion deficit within 10 years and would bring underfunded plans up to an 85% funding level within 15 years, an agency official said. Underfunding for single-employer plans was at $53 billion in 1992, according to the PBGC's most recent data.
Among changes made to the bill:
The administration agreed to phase in interest rates pension plans use when valuing liabilities and determining contribution amounts. Currently employers use a rate between 90% and 110% of the four-year weighted average of the 30-year Treasury bond. The new legislation would use 109% next year, and step down one percentage point each year until it reaches 105% in 1999. The earlier version would have set the interest rate between 90% and 100%.
The business community agreed to temporarily use a conservative mortality table, called GAM 83, until 2000 to calculate employee life expectancy rates. The Treasury Department would review past experiences of companies and analyze independent studies to come up with a new table to use in the plan year beginning in 2000.
The Treasury Department would review the table at least every five years and update it to reflect changes in the work force.
Also, in 1996, companies that have employees who retire on disability pensions would be able to use special mortality tables created by the Treasury Department.
"We're very satisfied with this," one administration official said. "It gets us the certainty we wanted and eliminates the 'gaming' of (companies) choosing their own mortality table."
Companies agreed to a transition rule to adjust to the funding rules based on the interest rate and mortality tables. The permanent rule would require funds less than 90% funded to contribute an additional payment - known as the deficit reduction contribution. In addition, if a plan's funding ratio is at 90% for two consecutive years, and then in the next two years dips below 90% but not under 80%, it can skip the DRC for both years.
For the first two years of the law's effective date, the rule would allow plans 80% funded or better to avoid the DRC.
The administration agreed to drop a provision requiring all companies to give the PBGC advance notice on corporate transactions, such as selling off a subsidiary or a business that is part of a controlled group. The agency did keep a provision to have advance notice of private companies' business transactions.
Several sources said the PBGC has adequate powers in protecting pension plans and did not need to meddle in other business affairs.
"The administration moved a very long way to address the concerns we were raising," said Janice Gregory, vice president of the ERISA Industry Committee, Washington. "The PBGC does very well with the powers it has under current law, and this would have gotten in the way of normal business transactions. It was overreaching and could have prevented business transactions from ever getting off the ground."
But despite what was negotiated, some business community members were concerned with the mandated mortality and interest assumption tables.
"Pension plans are not monolithic," said Gina Mitchell, director of government relations at Financial Executives Institute, Washington. "All of these elements are going to affect companies differently."
The legislation did keep the three-year phase-out of the variable-rate premium employers pay to the PBGC. The phase-out would be at 33% annually, and employers who were paying the maximum premium of $72 per participant would on average pay $140 per participant when the cap is phased out. The PBGC's Mr. Slate had estimated the new premium schedule would jump premium revenue to $1.4 billion.