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January 11, 1999 12:00 AM

CONSULTANTS SEEK CASH BALANCE PLAN LEGISLATION

Vineeta Anand
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    WASHINGTON -- A group of pension fund consultants is planning to ask lawmakers this month to craft legislation offering guidance on hybrid pension plans, which have proliferated in recent years.

    The proposal on hybrid pension plans, including the trendy cash balance plans, is prompted by frustration at the lack of regulatory guidance, even as hundreds of companies have rushed to set up such plans.

    Consulting firm PwCKwasha, Fort Lee, N.J., informally estimates that anywhere between 400 and 1,000 employers have some sort of hybrid pension plan, primarily cash balance plans.

    The appeal: Hybrids such as cash balance plans remain defined benefit plans, but contain attractive features of defined contribution plans, such as individual accounts and portability.

    Ann L. Combs, principal in the Washington office of William M. Mercer Inc. and a member of the National Cash Balance Practitioners' Group, said the group "is running out of patience at getting some guidance from the Internal Revenue Service, and so is trying to get some legislative clarity."

    At the top of the list: Employers with hybrid plans would like to be able to give employees just what they have promised -- the amount of money built up in their hypothetical individual accounts -- no less, no more.

    Current law prevents them from doing that because federal pension law defines pensions as monthly payments for life, starting at retirement age, so employers must convert account balances into the actuarial equivalent of annuities at retirement age.

    The group also wants clear approval that employers may use a variable interest rate from year to year. Most employers typically use an annual interest rate tied to the benchmark 30-year Treasury, on which the returns may vary from year to year.

    Employers currently using variable interest rates "are running scared" because the IRS has not categorically stated whether they may or may not use variable interest rates, according to a member of the group who declined to be identified.

    The group also wants affirmation that the account balances of employees who opt to leave their money in the plan when they quit would continue to grow at the annual rate specified by the employer.

    Because employers must convert account balances into annuities at retirement age, and then calculate the net present value of those annuities, these complex calculations can sometimes result in employers having to pay more than the account balances.

    The group also wants lawmakers to say whether employers can contribute surplus assets from a traditional defined benefit plan to employee accounts in a new cash balance plan. Because of the uncertainty of the current law, employers usually hesitate in using such techniques to sop up excess pension assets.

    Treasury officials could not be reached for comment on the proposal, which follows many months of discussion and work on a draft. It comes at the same time David Strauss, executive director of the Pension Benefit Guaranty Corp., has begun using his bully pulpit to call for clearing up the rules for hybrid plans and giving them greater flexibility.

    "We want to clarify the rules so everybody would know what they can and can't do," said Judy Schub, the PBGC's assistant executive director for legislative affairs.

    "We are not saying we love these plans or hate them, (but) we recognize what is happening out there. They are being adopted," she said.

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