WASHINGTON - The Pension Benefit Guaranty Corp. is considering drafting regulations to deal with shuttered cash balance plans.
But first, the federal pension insurance agency plans to formally ask plan sponsors, consultants and others in the pension industry for their help in framing the issues, said Stuart Sirkin, director of corporate policy and research.
The PBGC's plans to consider regulations on cash balance plan terminations come while it is grappling with the takeover of the cash balance plan of the defunct Caldor Corp.
The Norwalk, Conn.-based discount retailer's pension plan covered approximately 1,900 salaried workers, had assets of approximately $9.5 million, and was underfunded by $1.1 million.
Caldor had a second, larger traditional pension plan, with assets of $15.3 million and liabilities of $24.7 million, which covered rank-and-file workers. It was taken over by the PBGC in June after Caldor went into liquidation.
Because cash balance plans are defined benefit pension plans designed to look like defined contribution plans, regulations governing traditional pension plans don't work that well. And, failure of regulators to issue regulations specifically governing cash balance plans has raised a number of thorny questions for the PBGC when a company shuts down such a plan, Mr. Sirkin said.
For example, employees participating in cash balance plans get a hypothetical account, linked to pay, and are free to take their account balance as a single payment when they retire or quit their jobs. But the law requires the PBGC - which guarantees pensions when companies terminate their pension plans - to pay only monthly pensions to participants.
"You have people whose benefits have been expressed to them as a lump sum, so the participants' expectations are different," Mr. Sirkin said.
Then too, the way these plans are designed can make it hard for the PBGC to figure out how much participants are owed in pension benefits. Many of these plans link annual increases in participants' hypothetical account balances to variable indexes - such as the interest rate on the 30-year Treasury bond plus one percentage point -the PBGC could be in the tough spot of guessing those future interest rates in order to calculate how much participants are owed at retirement.
When the PBGC takes over a pension plan, it is required to tell participants what their pension benefit is, and how much they will receive each month.
In the Caldor plan, for example, participants' account balances grow each year by 5% or the consumer price index, whichever is more. Since the plan was set up in the early 1990s, the CPI has been less than 5%, so participants' account balances have grown by 5% each year. The PBGC is anticipating that inflation will be less than 5% for the foreseeable future, but participants could get more if the CPI rises by more than 5% in future.
PBGC officials also worry about how to handle participant-directed cash balance plans. "Participant-directed plans is obviously one of the complications we shudder at. At some time, we will get one of these," Mr. Sirkin said.
The PBGC has taken over eight terminated cash balance plans so far but because all of those plans gave employees the choice of staying in the old, traditional pension plan, the agency has not had to deal with the problems posed by such plan takeovers until now, Mr. Sirkin said.