WASHINGTON - The House Ways and Means Committee is expected to hold a hearing on pension reform this week, and although most pension industry representatives are happy to see legislation, many are not happy with specific provisions.
The Pension Retirement Protection Act of 1993 would help shore up the Pension Benefit Guaranty Corp.'s $2.5 billion deficit with accelerated funding levels and higher premium rates for underfunded defined benefit pension plans. The bills (S. 1780 and H.R. 3396) were introduced last year in the Senate by Sen. Daniel Patrick Moynihan, D-N.Y., in November and in the House by Rep. William Ford, D-Mich., in October.
The bill would need to be passed by two House and two Senate committees before it could go to a vote.
"Overall we think that the measure moves in the right direction, but there are some lingering concerns that it does add to problems that already exist," said James Klein, executive director of the Association of Private Pension and Welfare Plans, Washington.
Several groups think solving the agency's funding problem could be done differently than the bill prescribes.
"I think everyone wants the same thing but we're all taking different roads to get there right now," said Mark Ugoretz, president of the ERISA Industry Committee, Washington.
One of the main contentions is the provision in the bill that would nearly wipe out a rule that currently allows employers to use a non-discrimination test called cross-testing. Employers use cross-testing to estimate benefits at age 65 and to test age- and service-weighted plans for discrimination against younger, lower-paid employees based on those benefits.
The Treasury Department asked for input after its original idea caused an uproar in the pension benefits community. Limiting cross-testing only to targeted benefit plans, as the department initially proposed, would mean many small businesses would terminate existing plans, said Profit Sharing Council President David Wray.
Mr. Wray said small business owners would terminate their company pension plans (and probably set up a pension plan for themselves) if they could not generate enough profits to offset the costs of setting up a new type of pension plan for all employees.
The ERISA Industry Committee, Washington, was the first group to submit a new cross-testing proposal. In mid-January, ERIC proposed that age- or service-weighted plans pass through one of two possible gateways. These gateways would allow a plan to cross-test for non-discrimination if it had a fair mix of high- and low-paid employees in each compensation level.
"We were looking to do something that would meet Treasury's needs," said ERIC Vice President Janice Gregory.
"We've certainly taken a big chunk out of what was causing people to be so upset."
The Coalition for Profit Sharing Flexibility, a 12-member interest group task force headed by Mr. Wray's Profit Sharing Council of America, has approved its proposal for cross-testing.
In its proposal, the coalition would change the amount an employer needs to contribute to lower-paid employees' plans. Plans that have more higher paid employees and use cross-testing would need to contribute a minimum of 5% to lower-paid employees retirement plans. Currently, top-heavy plan sponsors need only contribute a minimum of 3%.
In addition, this proposal would be for plans established after Dec. 31, 1994, and would be effective for plan years beginning Jan. 1, 1996.
"We've tested the fairness of it and did actual scenarios," said Sam Murray, vice president for government affairs for the Profit Sharing Council. "It looked better than any other plan that cross-tests."
The APPWP has not yet submitted its cross-testing proposal to the Treasury. Tentatively, its idea would allow a plan to cross-test after employees qualify for specific age or service requirements. If plan benefits are based on a specific job title or an annual readjustment to the age and/or service requirement, then it would not be eligible for cross-testing.
In addition to the cross-testing provision, the PBGC legislation would lift the current variable rate premium cap for underfunded plans. The proposal would phase out the existing premium schedule over three years.
Currently employers with fully or overfunded plans pay a flat premium of $19 per participant. Employers with underfunded plans pay the flat rate plus a variable rate of $9 per participant for every $1,000 of underfunding, capped at $53 per participant. The maximum premium is $72 per participant.
With the new provision, PBGC Executive Director Martin Slate estimated underfunded plans that paid the $72 maximum per participant would pay about $140 per participant once the cap gets phased out. (Pensions & Investments, Oct. 4, 1993).
The Financial Executives Institute's Committee on Employee Benefits opposes the bill's formula for a premium increase, said Christopher Bone, a member of the FEI's committee and chief actuary at Actuarial Sciences Associates, Inc., Somerset, N.J.
The agency should not need larger premium collections if the PBGC's liabilities are decreased by faster funding schedules for underfunded plans, Mr. Bone said.
The FEI would like to see premiums linked to the PBGC's long-term liabilities and based on a plan sponsor's ability to meet pension promises.
ERIC has submitted its own pension reform proposal. It calls for a reduction in PBGC premiums, which would increase plan sponsors' cash flow.
"The ultimate bad joke would be to increase premiums to increase revenues to pay for funding of plans," ERIC's Mr. Ugoretz said.
In addition, the legislation would put underfunded pension plans on a faster funding schedule. Plans that are less than 60% funded would have to fund new benefits over a five-year period. Under a 1987 law, this rapid funding schedule generally applies to plans that are less than 35% funded.
ERIC's proposal puts plans that are less than 75% funded on the faster funding track. The FEI would like to see funding levels linked to the PBGC guarantee rather than a plan's funding level.