Goldman Sachs officials today said they expect Congress to pass a pension reform bill this year — possibly by mid-October. The reform bill "is likely to increase funding requirements for plan sponsors, reduce asset smoothing, increase (PBGC) premiums, and move to a corporate bond-based yield curve to value liabilities, among other changes," according to a guide to the reform process issued by Goldman Sachs to clients. "In addition, some relief for airlines is likely, though the situation surrounding this issue is clearly very fluid.
"The changes may force sponsors to put more money into their plans (and) maintain a higher level of funding ... Reforms could also have broader market implications to the extent they encourage plans to shift assets from equities to bonds."
The report also forecast that the Financial Accounting Standards Board, before the end of the year, will put on its agenda a project to overhaul FAS 87 that could address the "complicated and non-transparent smoothing mechanisms (that) lead to confusing financial statement representation." However, changes to U.S. accounting rules might not occur until 2007 or 2008, the report states.
Also, FASB, working with the International Accounting Standards Board, could seek to develop one set of accounting standards for use worldwide, the report notes. "We anticipate that any proposal by the FASB to impart more of a mark-to-market approach to pension accounting will be opposed by the plan sponsor community."
Separately, a new white paper by Towers Perrin officials said the three pension reform proposals being considered by Congress, though a step in the right direction, fall short of helping employers manage the financial risks of sponsoring defined benefit pension plans.
The white paper said a yield curve based on the interest rates of corporate bonds causes unnecessary complexity and is counterproductive. Instead, the consulting firm recommends a single rate linked to corporate bonds. Towers Perrin officials also believe a better proposal than those on the table would measure liabilities and assets on the same date. In the paper, they also propose letting corporations use surplus pension assets in excess of 120% of liabilities to fund other employee benefits, such as the employer contribution to 401(k) plans.
Both reports come as Congress considers the following proposals: the Bush administration's formal proposal presented in January, the House Education and the Workforce Committee's version, and the Senate Finance Committee's bill.