WASHINGTON — Cash balance pension plans and airlines might be the big losers in the Senate Finance Committee's pension legislation that aims to secure the PBGC's financial future and create a new method for employers to calculate their pension liabilities.
In contrast to the employer-friendly legislation that emerged from the House Education and the Workforce Committee June 30 — which would unequivocally legitimize all cash balance plans so long as they use the same benefit formula for all workers — the Senate Finance Committee legislation introduced July 22 did not clarify the legality of such plans.
A Senate Republican aide said members of the committee were still conducting last-minute wrangling over how best to resolve the thorny question of whether such hybrid plans discriminate against older workers. At best, an amendment to the bill blessing all future cash balance plans might get included on July 26, when the committee votes on the legislation. That would still leave hundreds of employers exposed to potential age-discrimination claims from participants and could prompt many of them to drop the plans, employer lobbyists say.
Sen. Charles E. Grassley, R-Iowa, chairman of the powerful tax-writing committee, favors a limited legislative solution for cash balance plans "as long as it is one that balances the interests of employers and employees," according to an aide.
"It's a no-brainer. If you want to keep them in the defined benefit system, and many of them are very healthy companies, you need to fix the issue," said Lynn Dudley, vice president and senior counsel at the American Benefits Council, Washington.
The National Employee Savings and Trust Equity Guarantee Act was introduced by Mr. Grassley and his Democratic counterpart, Max Baucus of Montana.
The bill offers no breaks for the financially strapped airline industry in contributing to underfunded pension plans. According to a Senate staffer, it's possible an amendment will be introduced allowing airlines to stretch out their contributions over 15 years. That way, they could fully fund their defined benefit plans before switching to defined contribution plans.
The House Education and the Workforce Committee bill did not include any provision offering relief to the airlines.
The Senate bill also differs from the House bill by more closely tracking the Bush administration's earlier package — with enough concessions at the margins to make it palatable to plan sponsors.
Under the Senate version of the legislation, as in the Bush administration proposal outlined on Jan. 10, employers would be required to pay higher insurance premiums based on their creditworthiness, and determine the present value of their liabilities using a multitude of interest rates on corporate bonds. While fully funded plans would have to pay $30 per participant in insurance premiums, from the current $19, companies with underfunded pension plans whose credit rating drops below investment grade — and stays there for two years — would contribute higher, "at risk" premiums to the Pension Benefit Guaranty Corp.
Companies with fewer than 500 employees would be exempt from the provision, and the Treasury Department would calculate the riskiness of privately held companies whose debt is not rated by evaluating their debt load.
Companies with assets less than 80% of liabilities would not be allowed to increase benefits, and companies with assets less than 60% would have to freeze their plans.
That House version of the legislation permits companies to adopt a three-tiered approach for calculating liabilities, a compromise rejected by many employers and actuaries as creating more problems than it solved. The House bill also lets companies smooth their assets and liabilities over three years, while the Senate Finance bill rejects such an approach as smoke and mirrors.
Unlike the House bill, the Senate Finance Committee bill does not offer major changes for funding rules of multiemployer plans, although it permits them to contribute up to 130% of current liabilities and allows corporate plans to contribute up to 180% of current liabilities. Current rules limit contributions to multiemployer plans to the "normal cost" plus an amount necessary to amortize the unfunded liability over 10 years. Single-employer plan sponsors may contribute between the minimum funding and full funding limits, based on a series of complicated calculations.
But like the House legislation, the Senate bill would let companies to take into account "credit balances" built up from excesses of earlier contributions. While current law lets companies count those contributions at face value, the Senate bill would require them to discount any investment losses on the earlier contributions. The House bill would also permit companies to subtract earlier contributions in calculating what they need to pony up, but with too many restrictions, some sources said.