The history of U.S. pension legislation over the last four decades is largely one of playing catch-up.
“Congress typically waits until there is some crisis,” said Phyllis Borzi, assistant secretary for the Employee Benefits Security Administration at the Department of Labor. “One of the beauties of the marketplace is that things change. The problem with government is that we tend to be more reactive than visionary, and Congress is 18 times more like that than anybody.”
Just ask the 11,000 employees of the Studebaker-Packard Corp., which in 1963 reneged on its defined benefit pension promises, leaving more than half with little or no retirement benefit. The lack of protection for private-sector workers shocked Congress into action, but it took more than a decade to come up with the solution, which came in the form of the Employee Retirement Income Security Act of 1974. The watershed law signed Sept. 4, less than a year after the first issue of Pensions & Investments, laid the ground rules for defined benefit plan sponsors on participation, funding, vesting, reporting, fiduciary duties and financial disclosure. The law also created a safety net for workers — the Pension Benefit Guaranty Corp.
Then there were the employees of Enron Corp., who were urged to keep adding company stock in their defined contribution plans. In 2001, asset values crashed as Enron executives sold their shares while the company slid into bankruptcy. That helped to raise awareness of the issue of company stock in retirement plans and led to several rounds of defined contribution reforms, but it was too late for Enron workers.
Massive industry upheaval in the airline and steel industries in the early 21st century also shook up what had been until then a rather sleepy PBGC, transforming an agency handling 73 defined benefit plan terminations in 2000 into one facing 186 terminations in 2002, all of which led to a whopping $23.3 billion deficit by 2004.
Another case of delayed reaction came in 1986, when Congress added a financial distress test for employers seeking to terminate their plans. “It's clear that Congress was trying to create a financial safety net, but from the beginning the program was not structured correctly,” said Ms. Borzi of EBSA. “Congress struggled in the '70s, '80s, '90s and even today over how to structure a system that does not encourage gaming and dumping.” Disagreement over how employers calculated their funding levels, plus bipartisan concern over the PBGC deficits that could have hurt taxpayers created the climate for the next big pension legislation, the Pension Protection Act of 2006.
The PPA provisions for shorter, seven-year amortization periods for measuring liabilities and more conservative interest rates for calculating them pleased accountants, CEOs and politicians pushing mark-to-mark accounting, but proved to be a tipping point for defined benefit plan sponsors, which started freezing or closing plans at an unprecedented rate, or at least seriously considering it. “It was the difference between a snapshot and a motion picture, which did contribute to a lot of additional volatility that caused concern to balance sheets,” said Drexel University law professor Norman Stein. With short amortization periods and new discount rates, “the legislation suffered from a kind of schizophrenia” that has since spilled over to the public sector, he said.
“It really put a lot more plans at risk,” said Diane Oakley, executive director of the National Institute on Retirement Security, Washington. As a congressional policy aide during the PPA debate, she said many people worried that the law was going too far and would drive more sponsors to terminate their defined benefit plans and send more plans to the PBGC. “The idea was to get more money into the plans, but the business response was to close the plans,” said a committee policy aide with the Senate Health, Education, Labor and Pensions Committee who asked not to be identified.