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Lawmakers compromise to pass major reforms of pension funding rules

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Lawmakers compromise to pass major reforms of pension funding rules

A multiyear drive to tighten pension plan funding rules came to an end in 2006 with Congress passing the biggest changes in pension funding rules since the enactment of the original pension reform law more than three decades ago.

That drive had its roots in several massive pension plan failures and the accompanying realization of the weaknesses in pension funding rules.

One example: In the three years prior to the federal Pension Benefit Guaranty Corp. taking over its pension plan in 2002, Bethlehem Steel Corp. did not contribute anything to its pension plan, which had a $3.7 billion deficit when the PBGC terminated the plan.

That massive underfunding of the Bethlehem plan was perfectly legal and was a prime and much trotted out example of how loopholes in federal law allowed companies to legally underfund their plans, exposing the PBGC to big losses.

And if the PBGC's revenues--comprised of premiums paid by employers with pension plans and investment income earned on assets held by the PBGC--were insufficient to pay benefits the PBGC pays participants in terminated plans, a taxpayer-subsidized bailout then would become a possibility.

That was a scenario that many members of Congress and the Bush administration--whose fears were fanned by a growing multibillion-dollar PBGC deficit--did not want to see develop.

Alarmed by the prospects of a PBGC collapse, the administration and legislators produced reform packages. The administration's package, unveiled in 2005, quickly fell by the wayside as legislators rejected it as being so harsh as to drive employers out of the defined benefit plan system.

But both the Senate and House passed their own reform packages in 2005 and the challenge for legislators in 2006 was to hammer out the differences in the two bills and agree on a compromise uniform reform bill.

It was a big challenge. To be sure, both the House and Senate reform packages included many similar, if not identical, provisions. Both measures, for example, accelerated funding schedules, barred employers with underfunded plans from boosting benefits and created a new methodology to value liabilities.

But there were plenty of differences, including the amount of time over which changes in interest rates--used to value plan liabilities--would be averaged, whether companies with below-par credit ratings would be required to make extra contributions to their plans, whether commercial airlines would be given extra time to fund their pension plans and what requirements employers setting up new cash balance plans would have to meet for the plans to be protected from age discrimination suits.

Resolving these differences took time--a lot of time. From March to late July, House and Senate conferees met to try to reach an agreement. Finally, with time running out as the month-long August recess neared, a final agreement was reached.

Give and take

In true congressional style, many differences were split. For example, while the House bill called for three-year smoothing of interest rate changes and the Senate bill set one-year, the final bill laid down a two-year smoothing rule.

Similarly, the final bill's concession to commercial airlines giving them 17 years to fund plan liabilities was a compromise from the 27-year amortization period in the Senate bill and no special funding relief in the House bill.

The impact of the legislation on pension plans will be huge. "It is the most significant change to pension laws in a generation," declared Lynn Dudley, vp and senior counsel with the American Benefits Council in Washington.

Rep. John Boehner, R-Ohio, said the new law, and its tougher funding rules, will help to avert would could have been a multibillion-dollar taxpayer funded PBGC bailout.

Others, though, were less optimistic. They worried that the tougher funding rules and the increased volatility due to the shortening of interest rate smoothing will ultimately drive out more employers from the defined benefit plan system.