ABC: Better DB Funding Status Disclosure Needed

In a report entitled Funding our Future: A Safe and Sound Approach to Defined Benefit Pension Plan Funding Reform, the American Benefits Council (ABC), asserted that a series of problems with the Administration’s plan “would result in far fewer defined benefit plans, lower benefits, and far more pressures on troubled companies that jeopardize the companies’ ability to recover.”

>As outlined by the ABC, the problems included:

• a “dramatic” cut in predictabiity for funding and plan premimums
• a “counterproductive and troubling” use of credit ratings
• a strong disincentive to prefund
• an increase in premimums at pension insurer the Pension Benefit Guaranty Corporation (PBGC) that “unjustifiably burdens the defined benefit plan system.” Lawmakers need to avoid hurting the underlying pension system in their efforts to financially prop up the insurer, the ABC said. “If we protect the PBGC at the expense of the defined benefit pension plan system, we will have failed in an ironic and sad manner,” the group’s report said.
• improperly forcing sponsors of terminating at-risk plans trying to determine their liabilities to assume that all employees would take lump-sum distributions and retire early. “The proposed early retirement assumptions would be unrealistic in the vast majority of cases and would severely burden any ‘at-risk company,’ thereby jeopardizing the company’s ability to recover,” the group wrote. “This is contrary to the interests of participants, the company and the PBGC.”

Reform Suggestions

>For its part, ABC asserted that there needed to be more timely pension plan funding status announcements than on the current summary annual report.

>Rather than disclosing information almost 24 months old – which ABC said is the case with the current report – the group said pension plans should be required to announce within 10 weeks of year-end both year-end asset valuation and beginning of the year liability figures as well. The start of the year data should be projected forward to the new year end and should take into account any significant events expected in the following 12 months such as a planned benefits hike, the ABC said.

“Numerous threats now endanger the health of the defined benefit system,” ABC President James Klein wrote in the report. “Employers are uncertain about the rules they will be required to follow starting next year. Thoughtful reform must be initiated now if we are going to prevent more plan freezes or terminations.”

>ABC proposals also included:

• permanently replacing the 30-year Treasury rate with the four-year weighted average of the long-term corporate bond rate. “This rate is a conservative estimate of the rate of return a plan can expect to earn and thus is an economically sound and accurate discount rate,” ABC wrote. “In addition, it is a clear, simple rule that can be understood and administered by employers of all sizes.”
• the importance of reducing volatility and ensuring predictability in funding plans. ABC said a plan’s assets and liabilities should not be based on spot valuations – an approach it said was “seriously flawed.”
• avoiding direct and indirect incentives to move plan investments away from equities. “We believe that any such structure (requiring DB assets to be invested in fixed income) would be disruptive and harmful to plans, companies, participants, and the economy as a whole.”
• requiring less well-funded plans to improve their funded status
• encouraging additional contributions during boom years. “The time to build up pension assets is during good economic times,” ABC wrote.

>Department of Labor Secretary Elaine Chao released the administration’s plan to reform the defined benefit system in a recent speech (See Chao Releases Administration DB Reform Proposal .)

>More information about the administration’s proposal is  here .