After working for more than a year to draft legislation, spending four months in an opaque conference committee reconciling the House and Senate versions, and achieving approval of final legislation in a rush before its August recess, Congress delivered a 1,099-page measure that rewrites U.S. pension laws.
Now corporations have to wade through the bill’s provisions, which contain interrelated policy on defined-benefit and defined-contribution pensions, relief for airlines and other industries, and assorted tax reform measures.
The provisions start on a staggered schedule, with new contribution calculations taking effect in January 2008. Over the next few months, the Internal Revenue Service must write regulations and Congress likely will pass a "technical corrections" bill.
"The funding rules are complicated," says Martha Priddy Patterson, a director of Deloitte Consulting in Washington, D.C. "It’s going to take people a long time to figure out exactly the impact on their plans."
For instance, companies will be prohibited from using credit balances if their pension is less than 80 percent funded. If it’s more than 80 percent, some balances can be utilized.
But the balances, which are built up by overpaying in flush years, must be subtracted from assets to determine whether a plan is "at risk." If it is less than 80 percent funded and sinks to less than 70 percent after worst-case assumptions about early retirement, then companies must increase their pension contributions.
In another complex area, the legislation shields future cash-balance plans, or hybrid plans, from age discrimination lawsuits—as long as companies follow rules regarding interest rates, vesting and conversions.
The bill does not protect the existing 1,500 cash-balance plans. But a few days after Congress approved the pension bill, a federal appeals court judge ruled that IBM did not discriminate against older workers by instituting its hybrid plan.
Even if the judgment withstands further appeal, it doesn’t ensure retrospective legality. Modifying current cash-balance plans to meet the rules established by the pension bill could introduce conversion obstacles.
"We have yet to weigh all the advantages and disadvantages of going one way or the other," says John Lowell, senior consultant with CCA Strategies, an actuarial firm. "It’s something we need to talk over with our clients individually."
Now companies will have to cover 100 percent of their pension promises within seven years, starting in 2008. In addition to curbing credit balances, the legislation will limit the smoothing of interest rates to a term of 24 months.
One of the few areas of the bill that has drawn unalloyed praise is the section on defined-contribution plans. Analysts agree that new rules promoting automatic 401(k) enrollment and making permanent the tax credits given to encourage savings will bolster retirement nest eggs.
Participation rates in 401(k) plans have hovered around 70 percent, says Catherine Collinson, senior vice president for strategic planning at Transamerica Retirement Services.
"This is going to propel them into the 90s," she says. "That’s going to get people started on saving earlier."
The new rules will allow companies to set up 401(k) plans without having to worry about state garnishment laws. "You’re going to see a big jump in the use of auto enrollment over the next two to three years," says David Wray, president of the Profit Sharing/401(k) Council of America.
Some experts believe the bill does more to foster defined-contribution approaches than it does to encourage companies to maintain their defined-benefit plans, which cover about 44 million Americans.
The legislation was spurred in part by Bush administration worries about a nearly $23 billion deficit at the Pension Benefit Guaranty Corp. and more than $300 billion in total pension underfunding.
Now companies will have to cover 100 percent of their pension promises within seven years, starting in 2008. In addition to curbing credit balances, which have allowed companies to skip payments in some years, the legislation will limit the smoothing of interest rates to a term of 24 months.
"There is no question but that the bill will reduce predictability and increase the volatility of contributions into plans," says Janice Gregory, senior vice president of the ERISA Industry Committee.
Spreading the pain around is a natural byproduct of the legislative process.
"It’s very difficult for Congress to pass a solution that’s perfect for any one party," says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
Workforce Management, August 28, 2006, p. 33 -- Subscribe Now!
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