WASHINGTON - Employers have until Sept. 5 to submit comments on a proposed regulation that may affect fully funded as well as underfunded pension plans and may drive up costs of actuarial valuations as much as 30%.
The proposed regulation, which is part of the Retirement Protection Act passed last year, would require plan sponsors with certain unfunded pension liabilities to disclose new financial and actuarial data to the Pension Benefit Guaranty Corp. The driving force behind the increased costs would be a complete valuation of liabilities on a termination basis, something companies don't normally do.
"I clearly understand their need for timely information, but I don't think that because a plan is underfunded that it necessarily poses a risk to the PBGC,"said David Walker, former PBGC executive director and now a partner at Arthur Andersen & Co., Atlanta. "The PBGC has a legitimate need to know, but this is overreaching."
The proposed regulation says the new law would affect:
Plan sponsors and members of their corporate groups that have an unfunded liability of $50 million or more.
Pension plan sponsors who had skipped a required contribution of $1 million or more.
Plan sponsors or any member of a corporate group that received an Internal Revenue Service minimum funding waiver of $1 million or more (Pensions & Investments, July 24).
Trade groups representing employers didn't like this part of the law to begin with, but when push came to shove, employers offered this one up as a trade-off to congressional and administration officials for another provision - which would have given PBGC power to step into pending transactions - in the bill before it became law.
"Most employers were really unaware of these implications," said Frank McArdle, manager of the Washington office for Hewitt Associates L.L.C.
The proposed regulation sounds straightforward, but observers say it asks employers to calculate liabilities using PBGC's conservative interest rates rather than simply supplying the raw data to the agency so it can do its own calculations. In the first step to comply with the proposed regulation, plan sponsors would need to find out whether the plan has at least $50 million in unfunded vested benefits; to do this, plan sponsors would need to use a rate of return equal to 80% of the 30-year Treasury bond rate.
This calculation isn't that hard to do, but it does skew the picture of the plan's funded status, observers said. Recent Treasury rates would force plan sponsors to use an estimated 5.5% interest rate. This calculation is now done only by companies that have to pay a variable-rate premium. The proposed regulation would force many companies that don't pay a variable-rate premium to make the calculation as well.
The PBGC has agreed to change the rate to 100% of the 30-year Treasury rate over time. Chris Bone, chief actuary at Actuarial Science Associates Inc., Somerset, N.J., said the full rate should be used at the onset, mostly because the proposed rate would include many plan sponsors whose plans aren't necessarily in any trouble.
"The PBGC has agreed that this is not a realistic basis .*.*. that's why (the rate) goes from 80% to 100%," Mr. Bone said, adding it doesn't make sense for companies that are underfunded when using the proposed rate to set up a system to make these calculations when they would be fully funded when using the full rate of the Treasury bond. ".*.*. It's irrational to trigger a huge flow of data and compliance costs based on what Treasury rates are going to be."
And while the PBGC estimates 100 companies would be affected by the proposed regulation, observers said many more - especially well-funded plans - would fall in this category.
"Companies, that according to their latest financial statements are 115% overfunded on a vested benefit basis could potentially fall into this (underfunded) category," said Mike Johnston, owner and actuary at Hewitt in Lincolnshire, Ill.
And for those who find themselves underfunded by $50 million, the next step sucks them into a whirlwind of calculations that some observers say are unnecessary for healthy plans.
Once a plan sponsor figures it has a $50 million unfunded vested benefit, it then has to determine liabilities on a termination basis.
"This is not something that (plan sponsors) are going to have in their hip pocket and will be able to pull out," Mr. Bone said. "It's not appropriate to ask for these calculations from a wide variety of plans that may not have an issue."
Instead of valuing liabilities on a termination basis, companies normally value liabilities assuming the plan will continue. Calculating liabilities on a termination basis, observers say, will drive up actuarial costs considerably.
"When we have to do another set of calculations, it's more paperwork and fees go up," says James Durfee, director of actuarial practice at Towers Perrin, Valhalla, N.Y. "It wastes our time and (plan sponsors') money."
The agency could use other ways to figure out whether a plan is in trouble, experts say. Information from the Schedule B section of the Form 5500, which provides actuarial information, or information from corporate financial statements which shows the value of benefit obligations and assets could provide preliminary data for the PBGC.
And based on that information, the PBGC could use its investigative powers to probe further into financial matters, experts said.
"If something isn't imminent, they ought to be able to live with current information already available," Mr. Durfee said.