President George W. Bush's fiscal 2006 federal budget was submitted to Congress today. Under the proposal, insurance premiums paid by employers to the PBGC would increase by more than $15 billion over the next five years. Janice Gregory, senior vice president of the ERISA Industry Committee, said, "The danger is that the impact of the administration's proposals taken in their entirety may hasten to drive healthy companies out of the (defined benefit) system, in which case even this premium increase may be short-lived."
The proposed budget includes legislative changes that would require employers to forgo benefit increases for their employees if their pension plans are underfunded, or if the company is in a precarious condition, in an effort to avert having the plans taken over by the financially strapped PBGC.
The budget also includes the administration's pension reform proposals, outlined Jan. 10, that would streamline funding rules under ERISA. The proposals would use a single set of rules to value pension liabilities; use the market value of pension assets, rather than an average; require employers to amortize their funding shortfalls over seven years; and allow employers to fund up their pension plans during good economic times, even if doing so would cause their assets to exceed the plan's funding target. It would also set deterrents for employers whose pension plans continue to run shortfalls.
Employers would be required to calculate the value of lump-sum payments to departing employees using the market value of interest rates based on a yield curve of zero-coupon corporate bonds, issued monthly by the U.S. Treasury secretary based on interest rates for high-quality corporate bonds. That proposal would be phased in and would not be fully effective until 2009.
The status of cash balance plans would also be clarified, and the ceiling on the interest rate employers can use on hypothetical individual accounts would be removed.