WASHINGTON - Some of the most stringent pension funding changes since the enactment of the Employee Retirement Income Security Act are tucked away in the General Agreement on Tariffs and Trade Congress passed this month.
The legislation became law on Thursday after being signed by President Clinton.
The law, known as the Retirement Protection Act of 1994, will phase in new contribution levels for plans that are less than 90% funded. It also also raises, and ultimately eliminates, the variable-rate premium cap that employers with underfunded plans now pay to the Pension Benefit Guaranty Corp.
Because of the law's complexity, actuaries hesitated to project overall annual dollar amounts sponsors of underfunded pension plans will contribute to plans in the future.
The PBGC estimates underfunded pension plans will contribute $43 billion to their pension plans over the next five years. That's a 15% increase from current contributions, a PBGC spokeswoman said.
Although some severely underfunded pension plans might see significant contribution increases later on, the changes will be phased in, resulting in gradual increases. Earlier versions of the legislation would have made more abrupt changes to contribution requirements.
"Plans are not going to be hit nearly as hard as they would have in the original legislation," said James Durfee, director of actuarial practice at Towers Perrin, Valhalla, N.Y.
One thing can be estimated: premium payments. Under the old law, plan sponsors paid the PBGC $19 annually for each plan participant. As a separate charge, employers paid $9 per participant for each $1,000 of underfunding, which was capped at $53. So, the most a plan sponsor could pay was $72 per participant.
The new reforms raise the $53 cap, phasing in the new payment schedule at 33% annually. Plans that paid $72 per participant could pay as much as $142 after the new payment schedule is phased in, a PBGC spokeswoman said.
About 8.2%, or 5,300 plan sponsors of the 64,000 single-employer plans covered by the PBGC, pay the $72 premium, the PBGC spokeswoman said. These 5,300 companies would make 93% of the premium payments made in the first five years of the law.
The Congressional Budget Office estimates the agency will collect $1.1 billion in premiums in fiscal year 1995, $81 million more than what would have been collected under the old law. In fiscal 1996, premium collection will increase to $1.3 billion, and in fiscal 1997, $1.6 billion will be collected - a total of $954 million more than under the old law.
The changes were made to reduce and eventually eliminate the $2.6 billion PBGC deficit as well as the 1993 estimate of $71 billion in total pension plan underfunding. PBGC Executive Director Martin Slate said the reforms should eliminate the agency's deficit within 10 years, as well as generate $1 billion over five years for the GATT, in part through rounding down limits employers and employees will be able to contribute to plans.
What's more, the reforms will bring underfunded plans up to an 85% funding level within 15 years.
"Strengthening pensions through better funding will strengthen the system as a whole," Mr. Slate said. "Workers and companies can now have greater confidence in a stronger pension system and the PBGC."
The new rules culminate efforts to improve pension funding launched by the Bush administration. To continue the work, Labor Secretary Robert Reich created the PBGC task force to study the underfunding issue. The first official draft of the legislation was issued in September 1993. Earlier this fall, Capitol Hill staffers, administration officials and business community representatives negotiated terms to the bill, which then was attached to the GATT.
Other changes included in the pension act are:
To help increase annual contributions, the law closes a loophole that allowed plan sponsors to double count credits to reduce pension contributions; it also requires underfunded pension plans to keep liquid assets equal to three years' worth of benefit payments.
The law requires plans that are less than 90% funded to make an additional payment, called the deficit reduction contribution. Depending on a plan's funding level, that payment must be made over five to 13 years.
The new rules include a transition provision that allows plans 80% funded or better to skip the DRC for the first two years of the law's effective date.
If a plan's funding ratio is at 90% for two consecutive years and then dips between 80% and 90% in the next two years, it can skip the DRC for both years.
Starting next year, the law also requires sponsors to use a special 1983 mortality table to value current liabilities through 1999. The Treasury Department could create an updated table in the plan year beginning in 2000.
While some sponsors now use this table, Hewitt Associates, Lincolnshire, Ill., estimates 78% of plan sponsors do not. And because the mortality rates are extended, most employer liabilities would increase, said Frank McArdle, manager of Hewitt's Washington office.
The reforms will phase in interest rate assumptions plan sponsors will use in valuing current liabilities and determining contribution amounts. Now employers use a rate between 90% and 110% of the four-year weighted average of the 30-year Treasury bond. The ceiling will decline to 109% next year and decrease by one percentage point each year until it falls to 105% in 1999.
Employers whose plans are less than 90% funded will need to provide plan participants clearly written information on the plan's underfunding and the PBGC's guarantee level.