Administration Opposed Prepared to Sign Pension Protection Act Relief
Posted on December 15th, 2008 by Chad De Groot | No Comments » Filed under: ., Employee Benefits, Politics, The Financial Crisis |
UPDATE (12/15/08): The House and Senate both passed the Worker, Retiree, and Employer Recovery Act this week, and according to SHRM, the President has reversed course and is expected to sign it. From SHRM’s article:
The House introduced and circulated a similar proposal in November 2008 during the start of the congressional lame-duck session following the presidential elections. The White House voiced initial opposition to the measure because of a controversial proposal to change the tax status of pension plans sponsored and operated by Indian tribal governments.
Bush dropped his objections to the pension relief proposal after House leaders stripped the Indian tribe provision from the final bill.
Our original reporting of the Bush Administration’s opposition is below.
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Recently, a number of groups consisting of well-known corporations with collective employees numbering in the millions, and employee benefit think-tanks, have been pleading with Congress to delay the requirements set forth in the Pension Protection Act of 2006 (“PPA”). The requests had received much congressional support, and the relief was seen as a necessary move to keep many businesses afloat and keep workers employed. However, the current administration disagrees and apparently sees funding these future obligations as more important than keeping current jobs.
In an effort to close loopholes through which employers were finding ways to avoid fully funding pension obligations to employees, the PPA generally requires that employer-sponsors of defined benefit plans achieve 92% funding this year on their way to 100% funding in 7 years. If a company does not satisfy the 92% requirement, and fails to stay on track with the 7-year plan, under the PPA, it will be required to have the plan 100% funded immediately (seriously).
Defined benefit plans are funded based on actuarial asumptions that determine the amount required to be contributed today in order to fund future promises. Such assumptions take into account mathematics that are well beyond the scope of us here at CE. But, we do know that an employer bears the risk of market fluctuations under such an arrangement. Therefore, when the economy is slumping and a defined benefit plan’s assets decrease as a result, the employer is on the hook to make up the deficiency. Obviously, requiring employers to fully fund these promises is necessary to ensure employees get promised benefits, but at what cost?
Financial Week published an article yesterday explaining that the administration has made clear its opposition to such a bill. This opposition stems from a concern that relaxing PPA requirements will allow plans that are already underfunded to become even more underfunded, thus increasing the liability of the Pension Benefit Guarantee Corporation (“PBGC”), which is already operating under a $11.2 billion deficit (note, the PBGC does currently have $61.6 billion in assets). However, what the administration seems to have missed is that the PBGC, like a defined benefit plan, is funded with an eye toward the future. It does not require full funding tomorrow in order to pay benefit obligations 30 years from now. Therefore, although desirable, it is not absolutely necessary that it acheive full funding immediately.
There is, however, an immediate need for companies to have cash and for workers to keep their jobs. It is likely that if the PPA requirements are not pushed back, or eased, many companies with such obligations will fail, and those that make it may be required to cut jobs anyway in order to comply with the PPA. In passing the PPA it certainly was not Congress’s intention to require defined benefit plans be fully funded if it meant putting the employees that were accruing the benefits under these plans out of work.
Proponents of the PPA relief are not proposing that the funding requirements go away completely so as to avoid the PPA altogther, but rather are simply asking for a bit of a break in light of the current economic downturn that is making funding these obligations for many companies a near impossiblity.
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