Pension plans drew short straw in PPA

Fifteen years after helping to craft and pass the Pension Protection Act, former Rep. Earl Pomeroy, likens the law to Dr. Jekyll and Mr. Hyde.

While he, and most others, is a supporter of the law's defined contribution provisions — such as creating qualified default investment alternatives and the legal framework for automatic enrollment — Mr. Pomeroy, former North Dakota Democratic representative and House Ways and Means Committee member who is now senior counsel with the Washington law firm Alston & Bird LLP, is critical of its impact on defined benefit plans.

Referring to the law as the "Pension Prevention Act," Mr. Pomeroy, who served in Congress from 1993 to 2011, said the enhanced funding requirements and shorter time frames to improve funding levels caused defined benefit plan sponsors to exit the pension space altogether.

At the time of the law's passage in 2006, Congress was looking to address a perceived crisis, said Michael P. Kreps, Washington-based principal and co-chairman of Groom Law Group's retirement services practice.

"There was a feeling in Congress that absent some action, PBGC would end up collapsing," Mr. Kreps said. "And so they took the relatively drastic steps to tighten the funding rules and improve PBGC's fiscal outlook."

When lawmakers sat down to hammer out the details in 2006, the Pension Benefit Guaranty Corp. was reeling after absorbing nine of the 10 largest pension plan claims in the five-year period preceding the act's passage. The size of those claims sparked concerns about the agency's solvency as well as about how to protect taxpayers from having to cover its deficits.

To improve funding levels of defined benefit plans, the Pension Protection Act established new funding requirements and shorter time frames.

Sponsors of underfunded plans saw more demands from the legislation to improve funding levels, and sponsors of cash balance plans received some legal clarity along with more rules aimed at preventing age discrimination and other abuses. Sponsors of well-funded plans gained more flexibility in their funding decisions, but moderately funded plans saw a significant increase in funding requirements, and poorly funded plans saw tighter amortization rates and higher PBGC premiums.

Due to the increased funding requirements, "employers that otherwise may not have jettisoned their plans probably did so," Mr. Kreps said. "But at the same time, if you look at the single (employer) program at PBGC, now it's doing pretty well."

At the end of fiscal year 2020 — Sept. 30 — the PBGC's single-employer program had a $15.5 billion surplus, $6.8 billion more than the previous fiscal year, according to the agency's most recent annual report.

But with the Great Recession hitting soon after the Pension Protection Act went into effect, plan sponsors were getting hammered on myriad fronts and many decided to close their pension plans in response, observers said.

"The PPA and ERISA itself depended on the notion that employers wanted to offer traditional pensions and would continue to do so even if the requirements to do so were made more stringent," said Joshua Gotbaum, a Washington-based guest scholar in the Brookings Institution's Economic Studies program and director of the Pension Benefit Guaranty Corp. from 2010 to 2014. "The lesson of the past 40 years and since the PPA is that that assumption was wrong. Employers, given the option, rather than meet the increasingly strict requirements of traditional pensions, would switch to 401(k)s."

The PBGC's single-employer program included about 23.5 million workers and retirees in about 23,200 private-sector plans at the end of the 2020 fiscal year, compared with more than 34 million people covered by nearly 28,800 such plans at the end of the 2006 fiscal year, according to PBGC reports.

For the multiemployer plans also experiencing underfunding problems, the Pension Protection Act gave trustees a new color-coded zone system and funding requirements based on plan funding levels, with green for healthy plans funded at 80% or better, yellow for endangered plans funded between 65% and 79%, and red for critical plans funded less than 65%.

Yellow- and red-zone plan trustees had to adopt funding improvement or rehabilitation plans, respectively.

The law's multiemployer pension piece was "geared at forcing plans to look down the road, identify problems and take proactive steps to fix their funding problems," Mr. Kreps said.

But then the economy crashed. "I think PPA probably would've worked on the multiemployer side but for the Great Recession," Mr. Kreps added. "It just couldn't work after that."

For years after the Pension Protection Act, lawmakers in Congress debated and negotiated on what to do with the steepening multiemployer pension crisis but failed to reach a consensus.

It wasn't until March, when Democrats in Congress passed the $1.9 trillion American Rescue Plan Act of 2021, that multiemployer pension plans got relief — an estimated $94 billion in federal assistance grants for the most at-risk plans to pay benefits.

The Pension Protection Act was intended to avoid using federal dollars to bail out failing pensions plans, Mr. Kreps said. "The whole point of PPA was to shore up the plans, to make trustees and bargaining parties make very, very difficult choices to shore up their plans and not let them just procrastinate on tough decisions, and they did," he said. But in the end, "The only option was (the American Rescue Plan), the special financial assistance," Mr. Kreps added.

Mr. Gotbaum noted that the American Rescue Plan's multiemployer relief was the only major pension decision in decades that wasn't bipartisan. "COVID released the budget constraints and basically the Democrats said after years of trying to negotiate an agreement with Republicans, 'We can't wait,'" Mr. Gotbaum said. Democrats passed the bill using budget reconciliation, which requires only a simple majority in the Senate instead of the usual 60 votes.

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, said she's grateful a legislative solution was ultimately released and wasn't surprised by the result.

"Between the two parties there was such a philosophical difference about how to address the issue that it just seemed like it would've taken another five to 10 years to find a compromise," Ms. Robinson said.

Ultimately, Alicia H. Munnell, director of the Center for Retirement Research at Boston College, is happy benefit cuts weren't inflicted upon workers and retirees. "I haven't reconciled in my own mind whether we've missed an opportunity for reform, but I'm happy that the beneficiaries were taken care of," Ms. Munnell said.