Last Friday, the House approved a measure that seeks to block the PBGC from taking over United Airlines' pension plans. The amendment was tacked on to an appropriations bill (H.R. 3010) and reads as follows:
SEC. __. None of the funds appropriated by this Act may be used by the Pension Benefit Guaranty Corporation to enforce or implement the "Settlement Agreement By and Among UAL Corporation and all Direct and Indirect Subsidiaries and Pension Benefit Guaranty Corporation'', dated April 22, 2005.The Wall Street Journal reports here that the measure indicates "how emotional the issue of troubled pension plans has become." The article points out that the "provision would have little impact, largely because the insurer's budget comes from collecting premiums from companies -- not from money appropriated by Congress" and that "the Senate isn't likely to approve such a provision."
For those of you who might not have been reading BenefitsBlog this time last year, you can read about another very emotional response to pension underfunding here.
If you wish to read the discussion on the House floor regarding the amendment, continue reading . . .
AMENDMENT OFFERED BY MR. GEORGE MILLER OF CALIFORNIA
Mr. GEORGE MILLER of California. Mr. Chairman, I offer an amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment offered by Mr. George Miller of California:
At the end of the bill, before the short title, insert the following:
SEC. __. None of the funds appropriated by this Act may be used by the Pension Benefit Guaranty Corporation to enforce or implement the "Settlement Agreement By and Among UAL Corporation and all Direct and Indirect Subsidiaries and Pension Benefit Guaranty Corporation," dated April 22, 2005.
The CHAIRMAN. Pursuant to the order of the House of June 23, 2005, the gentleman from California (Mr. George Miller) and the gentleman from Ohio (Mr. Regula) each will control 5 minutes.
The Chair recognizes the gentleman from California (Mr. George Miller).
Mr. GEORGE MILLER of California. Mr. Chairman, I yield myself 2 minutes.
Mr. Chairman, I join the gentlewoman from Illinois (Ms. Schakowsky) and the gentleman from New York (Mr. Crowley) to offer an amendment which will be the first time that will allow Congress, and perhaps the last time, to save the hard-earned retirement benefits of 120,000 workers and retirees at United Airlines.
Unfortunately, United Airlines has become a poster child for what is wrong with the private pension in this country. United filed for bankruptcy over 2 years ago and forced one wage concession after another from its workers, and then it unilaterally decided
[Page: H5115] GPO's PDF
that it would stop making the legally required pension contributions to its plans. It dragged on the negotiations with its employees and then, in the middle of the night, got up from those negotiations and dumped those retirement plans into the PBGC, causing those employees to lose somewhere from 30 to 60 percent of their retirement nest egg, of their retirement assets, of their future standard of living. That is what these people lost because United decided it would no longer negotiate to try to find a solution to this problem.
We see Delta Airlines that has frozen its pension plan, has asked to stretch out its payments so that it can protect the assets of its employees. United chose another idea: It would simply dump these liabilities onto the taxpayers of the United States of America. What United was not telling anybody was the truth. They were not telling them about their funding of their pension plans, about their liabilities of their pension plans. They simply decided they would terminate these plans in the PBGC.
So this is our chance. This is our chance to try to save the retirement nest eggs of the flight attendants, of the ramp workers, of the pilots, of all of the people that have given so much to have this airline continue to fly. We held an E-hearing. Over 2,000 people participated and told us what the real impact of these cuts would be on their families, on their children, on spouses with illnesses, on their parents. People who had worked 30, 35, 40 years for this company now find out that they have been terminated with no chance to go back.
This amendment says United Airlines has got to go back to the bargaining table and work out a provision to take care of this.
Mr. Chairman, I reserve the balance of my time.
Mr. REGULA. Mr. Chairman, I rise in opposition to the amendment, and I yield 3 minutes to the gentleman from Illinois (Mr. Kirk).
Mr. KIRK. Mr. Chairman, I thank the chairman for yielding me this time.
I rise in opposition to this amendment because it seeks to overturn two court decisions and what Judge Wedoff said was ``The least of the bad'' alternative ``choices here has got to be the one that keeps the airline functioning, that keeps employees being paid.'' We have to look out for the interests of all people, especially the 62,000 employees of United Airlines right now, just crawling out of bankruptcy, on whom the future of the entire western Chicagoland region, O'Hare Airport, and many of the related businesses depend. If we push United into bankruptcy, and especially if we push her further into liquidation, we will not only have an employee pension problem, but we will have a massive unemployment problem. We will also jeopardize the crown jewel of the economic development programs for Illinois, which is the modernization of O'Hare airport. O'Hare airport and its modernization depends on a functioning United Airlines. And for us to interfere with the two court decisions and the already declared decisions of four unions with United is a great mistake.
I think we should make sure that this process moves forward, we should make sure that this airline continues to function, and we should make sure that the 62,000 current employees of United are allowed to find their way back into profitability so they can put food on their table, especially in my district and other Illinois districts.
Mr. GEORGE MILLER of California. Mr. Chairman, I yield 1 minute to the gentlewoman from Illinois (Ms. Schakowsky), cosponsor of the amendment.
Ms. SCHAKOWSKY. Mr. Chairman, I rise today, with the gentleman from California (Mr. George Miller) and the gentleman from New York (Mr. Crowley), to offer an amendment that would protect the retirement security of dedicated United Airlines employees and retirees who support, and I want to underscore that, who support our amendment.
Our amendment would stop the Pension Benefit Guaranty Corporation from taking over United's four pension plans in one fell swoop. Our amendment would give Congress a chance to work out a better solution than pension termination.
I urge my colleagues to support this amendment because the threat to United's employees is real. This is not a straight hand-off from United to the PBGC. Although United's pension liability is $9.8 billion, the PBGC is only assuming $6.6 billion of the debt to United workers. The takeover of the plans will result in pension benefit cuts averaging 25 to 50 percent, a loss of $3.2 billion, for men and women who have worked for years with the promise of a secure pension. And it is on top of the $3 billion in concessions United employees already made.
We are on the cusp of a pension crisis in this country. The PBGC, without United, has a $23 billion deficit, and other companies are waiting in line to dump their pension benefits.
I urge my colleagues to support this measure.
Mr. REGULA. Mr. Chairman, I yield 1 minute to the gentleman from California (Mr. Dreier).
Mr. DREIER. Mr. Chairman, I rise in strongest opposition to the Miller amendment. Five unions have been involved in the negotiation process here to ensure that over 60,000 people are able to keep their jobs and a very, very important company continues to remain alive.
There is one union that has chosen not to be supportive of this. The fact that one union is not supportive of this agreement working between United Airlines and the Pension Benefit Guaranty Corporation has now created a scenario where we want to take the entire package down, and I believe that it would undermine a very important part of the commerce of the United States of America. We all know how important the airline is to the very vibrant economy that we have today.
So I urge my colleagues to oppose the Miller amendment and let us proceed to ensure that we do not see 62,000 people lose their jobs.
Mr. GEORGE MILLER of California. Mr. Chairman, I yield 1 minute to the gentleman from New York (Mr. Crowley), a cosponsor of the amendment.
Mr. CROWLEY. Mr. Chairman, I thank my friend and colleague from California for yielding me this time.
Mr. Chairman, I rise in strong support of the Miller-Schakowsky-Crowley amendment and urge all our Members here in the House to support it.
Is this amendment a cure to our Nation's employee pension problems? No. The problem is PBGC jumped too easily at a deal to put taxpayers on the hook for pensions, while allowing United to walk away from its responsibilities to its employees.
Representing the district that houses LaGuardia Airport and serving many Delta employees, I have real concerns about the bad precedent set by PBGC and worry that other airlines, and soon other industries, will follow United's lead.
As we know, Delta recently stated that it must pay $2.6 billion over the next 3 years to meet the obligations of its defined benefit pension plan. The carrier has warned in the past that its growing obligation poses a threat to restructure and avoid a bankruptcy filing. At the same time, UAL Chief Executive Gerald Grinstein has said that United would gain a competitive advantage on rivals by dumping its employee pension obligation.
This is bad precedent. Real pension reform is needed, and this amendment is to serve as a wake-up call to that fact.
Mr. REGULA. Mr. Chairman, I yield myself such time as I may consume.
I would just point out to the Members that this is a very delicately balanced arrangement and I think the risk to all of this is that if we were to adopt this amendment, the benefits that now are available to retirees under PBGC could even be lost, plus a lot of jobs could be lost. And we are inserting ourselves or would be inserting ourselves into something that has been worked out among all the parties in a way that is in the best interest of both active employees and retirees, and this is not the appropriate forum to deal with this subject.
We have legislation moving through the Committee on Education and the Workforce dealing with pensions, and this would set a precedent, I think, for our body, the U.S. House, to interject itself in something that should be handled by the parties, and I think what they are trying to do is to work it out in a way that is in the best interest of both the active employees and retirees.
Elaine L. Chao, U.S. Secretary of Labor and Chairman of the Board of the Pension Benefit Guaranty Corp.(PBGC), today announced the Bush Administration's plan for strengthening the retirement security of workers and retirees covered by private, single employer defined benefit pension plans. Chao states, in the announcement, that the Administration has become "increasingly concerned as the number of terminated plans grows and the PBGC is forced to assume ever larger liabilities" and that "[i]f nothing is done, the financial integrity of the federal insurance system will be compromised and the pension security of 34 million workers and retirees will be more at risk.”
The announcement provides that the Administration's plan is based on three main principles:
There is a Fact Sheet summarizing the proposal and entitled "The Bush Administration's Plan for Strengthening Retirement Security." Two interesting aspects of the proposal:
(1) The proposal includes a change to the PBGC premium structure so that it would include a "risk-based premium" which would be based on "plan underfunding relative to the appropriate funding target." The Fact Sheet notes that all underfunded plans would pay risk-based premiums.
(2) The proposal would allow "plan sponsors to make additional deductible contributions during good economic times." (It's about time!)
The Financial Times today (from Benefitslink.com) has an article--"Washington put on pensions alert"--reporting on an interview with Bradley Belt, executive director of the PBGC, who discusses the administration's concerns over the pension funding crises. Here is a part of what he had to say when asked about whether U.S. taxpayers might eventually be required to pick up the bill for employers' abandoned pension funding commitments:
“The challenges are multi-faceted and profound,” he said in an interview with the Financial Times. “They go from the narrow role of administering the insurance [program], to the future of the defined benefits system as a whole, to the wider issue of retirement security.”He called for the rules to be tightened for weak companies with underfunded plans and simplified for those that are healthy to encourage them to stay in the system. There also needed to be a change to the premium structure that funds the PBGC.
“The level received by the PBGC is simply inadequate to cover financial claims. The deficit will get larger.”
Mr. Belt wants to strengthen the agency's status in bankruptcies, to “enhance our ability to recover on our claims, so we are looking at our current priority and how we might classify pension contributions as administrative expenses”.
Regarding negotiations to reconcile a Senate pension funding bill passed last week (as discussed here) with the House version (discussed here and here), Forbes.com is reporting: "U.S. pension bill on ice as parties haggle." According to the article, "Democrats have refused to start talks to reconcile the Senate bill with a version that had already passed the House of Representatives, until they are assured of full participation in the negotiating sessions." The article further notes that Democrats are complaining that "the majority Republicans excluded some of their members from House-Senate negotiations on major bills last year."
The Committee on Education and the Workforce has issued a press release addressing the dispute: "Boehner, Johnson Blast Daschle for Holding Defined Benefit Pension Reform Hostage." Quote from the press release:
“All traditional pension plans in America have been under siege because of low interest rates and the one thing that Congress could do to help plans is to replace the defunct 30-year Treasury bond rate with a more appropriate interest rate,” said Johnson. “The House has passed a clean bill but Senator Daschle is holding the pension bill hostage.”
Finally, the Wall Street Journal reports as well: "Partisanship Flares In US Congress 30-Year Bond Debate." The article also notes the reason for the dispute:
"Democrats were shut out of talks on energy legislation, and left out of final negotiations on an enormous end-of-year spending bill in December. And only two Democrats were allowed in the closed-door sessions used to write the $520 billion Medicare plan enacted last fall."
As some of you may recall, pension legislation was at the center of some Capitol Hill acrimony last summer.
Reuters is reporting: "Senate Presses Forward on Pension Relief." According to the article, the Senate "pressed forward on Tuesday with a bill granting U.S. companies billions of dollars in pension funding relief, despite Bush administration protests over proposed extra breaks for the airlines and steelmakers" and that a final vote on the bill is scheduled for Wednesday. Differences between bills passed by the House and Senate must be reconciled before a final version can be sent to President Bush.
You can access information about the Pension Funding Equity Act of 2003, H.R. 3108, here. You can access some of the very interesting debate going on from the Senate floor here.
As many of you probably already know, three Cabinet secretaries said they would urge President Bush to veto the bill if it contains provisions giving special relief to airlines and other companies that have fallen behind in their pension payments, as reported at CNN.com: "Administration threatens veto of pensions relief bill." You can read the letter written to Senate majority leader, Bill Frist, here.
Continue reading for one Senator's remarks, likening pension funding deficits to credit card debt. This same Senator Fitzgerald spearheaded a hearing held yesterday on the mutual fund industry, which you can read about in a separate post.
"I know pension funding is something that perhaps makes the eyes of the press glaze over. Not many members of the public understand the importance of this. This is a very roundabout way of transferring liabilities to taxpayers. It is not easy for people to understand. But if I were to make an analogy that the average American could understand about what we are doing here, imagine that you have someone who is behind in their credit card payments. Imagine that you said to that person, you are behind in making your payments on the credit card. You are only making the minimum payment. You are trying to make a minimum payment due each month. You have this huge balance. It is going to take years and years to pay off this deficit of what you owe the credit card company or the bank. Imagine if this person were to have their minimum payments lowered. Imagine that when they are already just barely making the minimum payments, you say: OK, we will even lower your minimum payment.
We are doing that here. But in addition, we are going beyond that. We are telling the credit card holder while you are lowering your minimum payments and digging the hole deeper so that you are likely never to get out of debt, we are going to go out and allow you to continue spending and add more to your credit card. Can you imagine a credit card company telling anybody that? That wouldn't be a way to advise a distressed consumer to try to get out of debt.
We are doing that and more here today in the Senate. We are not only allowing these companies to quit making their required payments into their pension plans, but we are allowing them to continue spending. We are allowing them, specifically if they are 60-percent funded, to keep sweetening the pension benefits for their employees and digging the hole deeper. That would be not only allowing the credit card holder to keep spending but encouraging the credit card holder to go out while they are behind in the payments on this one credit card and get some more credit cards and run up balances on those credit cards.
Obviously, if we pass this legislation we are going to make it hopeless for some companies ever to recover and to fulfill the promises they have made to their pension participants."
Unlikely. The Wall Street Journal is reporting: "US House Departs, Leaving Airline Pension Break For '04." Also, Forbes is reporting: "U.S. House snubs Senate-proposed pension relief." The latter article notes:
Senate aides were not optimistic that either of the House-passed pension relief bills could move through their chamber when it returns to work on Tuesday, possibly its last day of work this year. Both chambers must pass the same version of legislation before it can become law.
The Washington Times is reporting a corporate lobbyist as saying that it is not likely that the Senate is going to come to any agreement over the whole pension funding issue: "Needed pension fixes may not come."
Yesterday, the House approved legislation (H.R. 3521) that, among other things, provides pension-fund relief for airlines and other companies struggling to meet pension obligations for their employees. Articles on the legislation:
You can access the House legislation here (via Benefitslink.com) and here as well.
The American Benefits Council website also reports on the bill:
Specifically, for plan years beginning in 2004 and 2005, the proposal replaces the 30 year rate with a range of rates within 90-100% of the four year weighted average of rates on amounts invested conservatively in long-term investment grade corporate bonds as determined by the Secretary of the Treasury. The rate would be applicable for funding and Pension Benefit Guaranty Corporation premiums. It would not be applicable to lump sums calculations. The extenders bill also includes limited relief on the deficit reduction contribution. The proposal would permit a waiver of a portion of the deficit reduction contribution for the next two years and would be applicable to airlines only.
In the Senate, the Finance Committee and the Health Education, Labor and Pensions (HELP) Committee are continuing to work towards a compromise package relating to pension funding.
A related story from the New York Times: "A Plan to Postpone Pension Financing at United."
The Wall Street Journal today has an interesting article: "Is Pension Crisis a Scapegoat"? The article notes that "[c]ompanies across the country have been taking an ax to their pensions, citing rising costs and the declining health of their pension plans." The article goes on to say that "[e]mployers eager to cut pensions blame the "perfect storm" of falling stock prices and low interest rates" but that "employees say their pension plans aren't as sick or costly as their employers claim." The article mentions a Bear Stearns report released last week which said that pension plans are now on a "path to recovery," predicting that by the end of 2004, pension underfunding for the 100 companies with the biggest benefit obligations in the Standard & Poor's 500-stock index will drop to 2%, from 12% at the end of this year.
The most interesting part of the article:
In August, the American Bar Association's leadership announced that it would be cutting the pension plan for 900 staffers, citing stock declines and low interest rates, even though both trends had reversed themselves this year. But 400 skeptical ABA staffers passed the hat and collected more than $10,000 to hire legal counsel and an actuary to go over the pension plan in detail. The actuary, Kathleen E. Manning of MWM Consulting Group in Chicago, found that the pension plan was well funded, and, in a report presented to the association in August, noted that the liability -- and future costs -- of the pension looked unreasonably high because the association's projections assumed that interest rates and investment returns would remain seriously depressed. She added that a likely rise in interest rates and the stock market's continuing recovery could solve much of the ABA's potential pension problem.
There are many articles today regarding the PBGC's deficit reaching a record $8.8 billion as of August 31st. This from Steven Kandarian, executive director of the PBGC, speaking to the U.S. Senate Special Committee on Aging at a hearing entitled "America's Pensions: The Next Savings and Loan Crisis?" The Wall Street Journal reports: "Federal Pension Agency Shows Wider Deficit." (Subscription required.) Newsday.com also reports: "Deficit at Pension Insurance Agency Soars." You can read Mr. Kandarian's testimony here. You can actually view the hearing at this link and read other testimony at the hearing as follows:
On the health care front, the Wall Street Journal also has this: "Your Health Plan's New Math: Many People Must Rethink Benefit Choices This Year As Firms Revamp Options." The article discusses how employers have been "[s]tung by what is expected to be the fifth consecutive year of double-digit increases in health-care costs" and that "many employers are aggressively revamping their offerings -- dropping old options, adding new ones and making subtle but important changes" in their health plans. The article focuses on how employers like International Paper and Lockheed Martin are shifting to "consumer driven" health care approaches.
House Education & the Workforce Committee Chairman John Boehner (R-OH) last week introduced the Pension Funding Equity Act (H.R. 3108), legislation that would replace the current 30-year Treasury bond interest rate with a rate based on long-term corporate bonds for certain pension plan funding requirements. The bill reportedly will be considered on the House floor by the end of the month, and appears to benefit from strong support from a bipartisan group of co-sponsors. For the text of the legislation, you may continue reading . . .
H. R. 3108
To amend the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 to temporarily replace the 30-year Treasury rate with a rate based on long-term corporate bonds for certain pension plan funding requirements and other provisions, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
September 17, 2003
Mr. BOEHNER (for himself, Mr. THOMAS, Mr. GEORGE MILLER of California, Mr. RANGEL, Mr. SAM JOHNSON of Texas, and Mr. PORTMAN) introduced the following bill; which was referred to the Committee on Education and the Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
--------------------------------------------------------------------------------
A BILL
To amend the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 to temporarily replace the 30-year Treasury rate with a rate based on long-term corporate bonds for certain pension plan funding requirements and other provisions, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Pension Funding Equity Act of 2003'.
SEC. 2. FINDINGS; SENSE OF CONGRESS.
(a) FINDINGS- The Congress finds the following:
(1) The defined benefit pension system has recently experienced severe difficulties due to an unprecedented economic climate of low interest rates, market losses, and an increased number of retirees.
(2) The discontinuation of the issuance of 30-year Treasury securities has made the interest rate on such securities an inappropriate and inaccurate benchmark for measuring pension liabilities.
(3) Using the current 30-year Treasury bond interest rate has artificially inflated pension liabilities and therefore adversely affected both employers offering defined benefit pension plans and working families who rely on the safe and secure benefits that these plans provide.
(4) There is consensus among pension experts that an interest rate based on long-term, conservative corporate bonds would provide a more accurate benchmark for measuring pension plan liabilities.
(5) A temporary replacement for the 30-year Treasury bond interest rate should be enacted while the Congress evaluates permanent and comprehensive funding reforms.
(b) SENSE OF CONGRESS- It is the sense of the Congress that the Congress must ensure the financial health of the defined benefit pension system by working to promptly implement--
(1) a permanent replacement for the pension discount rate used for defined benefit pension plan calculations, and
(2) comprehensive funding reforms aimed at achieving accurate and sound pension funding to enhance retirement security for workers who rely on defined pension plan benefits, to reduce the volatility of contributions, to provide plan sponsors with predictability for plan contributions, and to ensure adequate disclosures for plan participants in the case of underfunded pension plans.
SEC. 3. TEMPORARY REPLACEMENT OF 30-YEAR TREASURY RATE.
(a) EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974-
(1) DETERMINATION OF PERMISSIBLE RANGE-
(A) IN GENERAL- Clause (ii) of section 302(b)(5)(B) of the Employee Retirement Income Security Act of 1974 is amended by redesignating subclause (II) as subclause (III) and by inserting after subclause (I) the following new subclause:
`(II) SPECIAL RULE FOR YEARS 2004 AND 2005- In the case of plan years beginning after December 31, 2003, and before January 1, 2006, the term `permissible range' means a rate of interest which is not above, and not more than 10 percent below, the weighted average of the rates of interest on amounts conservatively invested in long-term corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. Such rates shall be determined by the Secretary on the basis of one or more indices selected periodically by the Secretary, and the Secretary shall make the permissible range publicly available.'.
(B) SECRETARIAL AUTHORITY- Subclause (III) of section 302(b)(5)(B)(ii) of such Act, as redesignated by subparagraph (A), is amended--
(i) by inserting `or (II)' after `subclause (I)' the first place it appears, and
(ii) by striking `subclause (I)' the second place it appears and inserting `such subclause'.
(C) CONFORMING AMENDMENT- Subclause (I) of section 302(b)(5)(B)(ii) of such Act is amended by inserting `or (III)' after `subclause (II)'.
(2) DETERMINATION OF CURRENT LIABILITY- Clause (i) of section 302(d)(7)(C) of such Act is amended by adding at the end the following new subclause:
`(IV) SPECIAL RULE FOR 2004 AND 2005- For plan years beginning in 2004 or 2005, notwithstanding subclause (I), the rate of interest used to determine current liability under this subsection shall be the rate of interest under subsection (b)(5).'.
(3) PBGC- Clause (iii) of section 4006(a)(3)(E) of such Act is amended by adding at the end the following new subclause:
`(V) In the case of plan years beginning after December 31, 2003, and before January 1, 2006,
the annual yield taken into account under subclause (II) shall be the annual yield determined by the Secretary of the Treasury on amounts conservatively invested in long-term corporate bonds for the month preceding the month in which the plan year begins. For purposes of the preceding sentence, the Secretary of the Treasury shall determine such yield on the basis of one or more indices selected periodically by the Secretary, and the Secretary shall make such yield publicly available.'.
(b) INTERNAL REVENUE CODE OF 1986-
(1) DETERMINATION OF PERMISSIBLE RANGE-
(A) IN GENERAL- Clause (ii) of section 412(b)(5)(B) of the Internal Revenue Code of 1986 is amended by redesignating subclause (II) as subclause (III) and by inserting after subclause (I) the following new subclause:
`(II) SPECIAL RULE FOR YEARS 2004 AND 2005- In the case of plan years beginning after December 31, 2003, and before January 1, 2006, the term `permissible range' means a rate of interest which is not above, and not more than 10 percent below, the weighted average of the rates of interest on amounts conservatively invested in long-term corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. Such rates shall be determined by the Secretary on the basis of one or more indices selected periodically by the Secretary, and the Secretary shall make the permissible range publicly available.'.
(B) SECRETARIAL AUTHORITY- Subclause (III) of section 412(b)(5)(B)(ii) of such Code, as redesignated by subparagraph (A), is amended--
(i) by inserting `or (II)' after `subclause (I)' the first place it appears, and
(ii) by striking `subclause (I)' the second place it appears and inserting `such subclause'.
(C) CONFORMING AMENDMENT- Subclause (I) of section 412(b)(5)(B)(ii) of such Code is amended by inserting `or (III)' after `subclause (II)'.
(2) DETERMINATION OF CURRENT LIABILITY- Clause (i) of section 412(l)(7)(C) of such Code is amended by adding at the end the following new subclause:
`(IV) SPECIAL RULE FOR 2004 AND 2005- For plan years beginning in 2004 or 2005, notwithstanding subclause (I), the rate of interest used to determine current liability under this subsection shall be the rate of interest under subsection (b)(5).'.
(3) CONFORMING AMENDMENT- Section 415(b)(2)(E)(ii) of such Code is amended by inserting before the period at the end `, except that in the case of years beginning in 2004 or 2005, `5.5 percent' shall be substituted for `5 percent' in clause (i)'.
(c) PROVISIONS RELATING TO PLAN AMENDMENTS-
(1) IN GENERAL- If this subsection applies to any plan or annuity contract amendment--
(A) such plan or contract shall be treated as being operated in accordance with the terms of the plan or contract during the period described in paragraph (2)(B)(i), and
(B) except as provided by the Secretary of the Treasury, such plan shall not fail to meet the requirements of section 411(d)(6) of the Internal Revenue Code of 1986 and section 204(g) of the Employee Retirement Income Security Act of 1974 by reason of such amendment.
(2) AMENDMENTS TO WHICH SECTION APPLIES-
(A) IN GENERAL- This subsection shall apply to any amendment to any plan or annuity contract which is made--
(i) pursuant to any amendment made by this section, and
(ii) on or before the last day of the first plan year beginning on or after January 1, 2006.
In the case of a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986), this paragraph shall be applied by substituting `2008' for `2006'.
(B) CONDITIONS- This subsection shall not apply to any plan or annuity contract amendment unless--
(i) during the period beginning on the date the amendment described in subparagraph (A)(i) takes effect and ending on the date described in subparagraph (A)(ii) (or, if earlier, the date the plan or contract amendment is adopted), the plan or contract is operated as if such plan or contract amendment were in effect; and
(ii) such plan or contract amendment applies retroactively for such period.
(d) EFFECTIVE DATE-
(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to years beginning after December 31, 2003.
(2) LOOKBACK RULES- For purposes of applying subsections (l)(9)(B)(ii) and (m)(1) of section 412 of the Internal Revenue Code of 1986 and subsections (d)(9)(B)(ii) and (e)(1) of section 302 of the Employee Retirement Income Security Act of 1974 to plan years beginning after December 31, 2003, the amendments made by this section may be applied as if such amendments had been in effect for all years beginning before such date.
(3) NO REDUCTION REQUIRED- In the case of any participant or beneficiary, the amount payable under any form of benefit subject to section 417(e)(3) of the Internal Revenue Code of 1986 shall not be required to be reduced below the amount determined as of the last day of the last plan year beginning before January 1, 2004, merely because of the amendments made by subsection (b)(3).
Today, the Senate Finance Committee unanimously passed the National Employee Savings and Trust Equity Guarantee ("NESTEG") Act introduced by Senator Charles Grassley of Iowa. You can access the Press Release from the U.S. Senate Committee herewhich states:
The committee pasesd Grassley's legislation, the National Employee Savings and Trust Equity Guarantee (NESTEG) Act, which tightens protections for retirement plan participants in the future in light of the collapse of the Enron Corp., WorldCom, Global Crossing and other similarly situated companies. The committee passed the bill last year, but the then-Democratic Senate leadership never allowed the full Senate to vote on the legislation. . . The NESTEG Act includes new diversification rights for company stock in plans; new disclosure requirements for transaction suspension periods, or black-outs; and new disclosure through periodic benefit statement and retirement savings information. . . .Grassley's legislation also includes a series of reforms to rein in executives' ability to defer payment of tax on their compensation. . . [and] includes his proposal to replace the 30-year Treasury bond rate formerly used in calculating pension plan contributions.You can read the Description of the Senate Finance Committee Chairman's Mark of the "National Employee Savings and Trust Equity Guarantee Act" here and the Blue Book here.
Also, this from the House Education and the Workforce Committee: "Boehner Introduces Bill to Address 30-Year Treasury Interest Rate, Enhance Retirement Security for Workers in Defined Benefit Pension Plans." Ways & Means Committee Chairman Bill Thomas (R-CA), Education & the Workforce Committee ranking Democrat George Miller (D-CA), Ways & Means Committee ranking Democrat Charlie Rangel (D-NY), Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX), and Rep. Rob Portman (R-OH) are original cosponsors of the bill.
More on the bills from these articles:
The Securities Industry Association issued this statement today opposing certain provisions of NESTEG.
CCH also reports: "Grassley Unveils Pension Reform Mark."
I was in meetings all day yesterday and unable to post here, but will try to catch up today.
On Monday, in a hearing entitled "Safeguarding America's Retirement Security: An Examination of Defined Benefit Pension Plans and the Pension Benefits Guaranty Corporation," the Senate Subcommittee on Financial Management, the Budget, and International Security and the Committee on Governmental Affairs received testimony from various groups on the pension funding crisis:
You can view the hearing at this link.
Also on Monday, the Seventh Circuit Court of Appeals declined to reconsider this earlier decision holding that Xerox Corp. had paid out too-small lump sums to participants in its cash-balance plan. A Wall Street Journal article reports: "Treasury to Issue Guides On Cash-Balance Payouts." The article reports a Xerox spokeswoman as saying that the company is "disappointed" by Monday's appeals court's decision and is considering a further appeal.
Yesterday's Wall Street Journal carried these articles on pensions:
During the nine months ended June 30, Siemens' pension plans earned an annualized 6.9% on its German plan and 14% for its main foreign plans, and its pension deficit shrunk. The Dow Jones Stoxx 600 index rose an annualized 5.6% and Merrill Lynch global broad bond-market index fell an annualized 5.8% during the same period. . . To achieve those results, simians' pension plan changed the weighting of stocks in its portfolio from 21% at the end of last year, to 8% at the end of March, and back to 23% at the end of June. Those moves followed a cut to 33% as of Sept. 30, 2002, from a weighting of 61% Sept. 30, 2001.
Today's Wall Street Journal reports: "Streamlined Pension Legislation Is to Be Introduced in the House." The article discusses two bills in Congress which are the most likely candidates for addressing the pension crisis. The New York Times also reports: "Senate Panel Expected to Vote on Bill to Aid Pension Plans."
In preparation for the Senate Finance Committee’s mark-up today of Chairman Charles Grassley’s (R.) latest revision of the National Employee Savings and Trust Equity Guarantee Act, the American Benefits Council released the following statement concerning the legislation’s use of the Bush Administration’s yield curve proposal to replace the current 30-year Treasury rate for making calculations for funding defined benefit pension plans: "Senate yield curve proposal could drive more companies from the pension system."
Newsday.com is reporting: "Avaya switching salaried employees from pension to 401(k) plan." The article states that Avaya Inc. is ending its defined pension plan for U.S. salaried employees and instead beefing up its 401(k) plan, affecting approximately 8,300 salaried employees in the United States. According to the article, Avaya's pension plan had assets of $1.94 billion and was underfunded by $798 million as of Sept. 30, 2002.
The Philadelphia Inquirer today reports: "United struggling with pension options." The article states that "United Airlines, seeking ways to ease a huge pension burden before emerging from bankruptcy, faces several unpleasant options, including, as a last resort, terminating the plans, according to industry analysts." The article also reports that "United is pushing Congress for changes to pension-funding laws, particularly regarding the deficit-reduction contributions, which have the effect of front-loading the financial burden." Another article on the subject at RockyMountainNews.com: "Retired pilots defend pensions: Ex-United workers seek help to ensure benefits aren't cut."
On Wednesday, FASB pushed back the target date for issuing new rules to force companies to expense options as they began discussions on the controversial topic of stock option valuation. Reuters reports: "US accounting board tackles option valuation." According to the article, FASB said it expected to issue a proposed rule in the first quarter next year and a final rule by the third quarter after that. It also debated the merits of various models to value stock options, "stating a preference for a model other than the widely used but often-criticized Black-Scholes method." The San Mercury News reports on the action taken as well: "FASB delays stock-option proposal."
EBIA Weekly in their newsletter is reporting that the Treasury Department has released two letters, Treasury Tax Correspondence, 2003 TNT 172-44 and 2003 TNT 172-45, indicating that it is reconsidering the issue of whether reporting on Form 1099 is required for payments to health care providers with debit/credit cards under health FSAs and HRAs. The letters state that Treasury is reviewing "whether the reporting requirement is appropriate under existing law [and] the appropriateness of applying any reporting requirements on a prospective basis." As discussed here in a previous post, Harry Beker, Esq., of the Office of Chief Counsel with the IRS, speaking at a conference of the Employers Council on Flexible Compensation (ECFC), announced that officials were looking into a possible waiver of the 1099 requirement.
"Heard Off the Street: The pension time bomb may explode, or perhaps it's just a dud": the Pittsburgh Post-Gazette reports. The article gives a good summary of PBGC Executive Director Steven A. Kandarian's testimony before a congressional committee last week that outlined why the PBGC is in such bad shape:
Active workers account for 53 percent of those insured by the PBGC, down from 78 percent in 1980;Companies in the most mature, capital intensive industries that have the toughest time funding plans also have huge numbers of older workers and retirees;
People are living longer in retirement: 18.1 years for the average male today, vs. 11.5 years in 1950;
Pension funding rules prevent companies from increasing contributions when they can afford to and don't require weak companies to fund underfunded plans.
If you would like to learn more about the U.K.'s pension system and the problems they are struggling with, read "Don't bumble in pensions jungle" at the Liverpool Echo. The article states that "few aspects of the financial world are so confusing and jargon-ridden as pensions" but that "[d]espite the uncertainty one thing is true, however - a struggling pension is better than no pension at all."
"The Benefits Buffet: By picking wisely, workers can save money and keep their budget healthy": Mark Schwanhausser for the Mercury News via Yahoo! News reports. The article notes an ugly prediction for 2004 for most workers: "Your pay will remain flat, but your health-care bills will rise. Somehow, you must squeeze several hundred dollars from your budget just to break even." Employees are counseled to work hard at examining their benefits packages and to make wise decisions about choosing the benefits that are right for them, even though trying to decide what to choose is likened to eating an elephant.
The Associated Press for the Washington Post has a good article on how companies are helping employees plan for retirement: "Companies Helping Workers Plan Retirement." The article reports that at "Ernst & Young, requests for proposals to design and run retirement planning programs for companies are about 20 percent higher this year, compared with typical annual increases of 2 percent to 3 percent over the past decade."
On a related subject, PlanSponsor.com has an article entitled "Schwab Offers Participants Free Advice", discussing how Schwab Retirement Plan Services has announced that "participants in plans serviced by Schwab Retirement Plan Services will now have access to customized advice either online, by phone, or in person - including specific recommendations among the core investment fund choices available in a retirement plan – courtesy of an arrangement with San Jose, California-based GuidedChoice." According to the article, Schwab is providing the Guided Choice tool for free.
Mark Davis for the Kansas City Star reports: "Companies free employees to sell stock." The article notes that many companies have "unlocked" their employees 401(k) stock accounts permitting them to sell their company stock and invest the money elsewhere, but that employees are not taking advantage of the flexibility as much as would be expected in light of the Enron and WorldCom disasters. The article looks into why employees are not diversifying. The most compelling reason (IMHO) is found in this statement: "Everybody's dreaming about the company's stock exploding like it did five years ago." Unfortunately, the article predicts that "[t]hat's just not going to happen."
David R. Francis for the Christian Science Monitor writes: "Pension funds pinched, stirring calls for reform." The article reports: "Of the companies in the Standard & Poor's 500 index, 353 offer traditional pension plans, as opposed to voluntary savings plans for employees such as 401(k)s. Of those firms, at least 322 pension plans were underfunded as of mid-June."
Today's Federal Register.
The Wall Street Journal today shows in this article--"Massive Blackout Retreats Stubbornly in U.S., Canada: 'Cascade' of Problems Appears To Be the Worst Since 1996"--that Pennsylvania was affected by the power outage. But fortunately, we did not experience any outage here. I am sure that many of my readers did.
Also on the power outage, Renee Deger for the Recorder via Law.com reports: "Zapped by Outage, Firms Scramble to Cope."
On pension funding, the Wall Street Journal today reports: "Gloom Lifting for Pension Plans." The article discusses how the "sudden summer upturn in interest rates, combined with the improving stock market" has had a powerful effect on pension plan funding. The article reports that a "one percentage-point change in long-term yields easily can shrink or inflate a company's pension liability by 10% or more" and that the "bellwether 10-year Treasury note has soared nearly 1.5 percentage points since June."
Who will pay for this $4 million tab? The retirement plans or Enron? "Payment sought for pension work: At question is who pays the $4 million for plan management": Eric Berger for the Houston Chronicle reports.
There are quite a few articles today covering developments in the attorney-client privilege arena:
"IRS Case tests Attorney-Client Privilege": the Washington Post reports. The article quotes Lawrence J. Fox, a Philadelphia lawyer and former chair of the American Bar Association's ethics committee, as saying, "It is my view that any time the identity of the client carries with it more information than [just] the identity of the client, then there is an obligation on the part of the law firm to refuse to turn it over." Mr. Fox, according to the article, called the Jenkens & Gilchrist summonses "the very worst form" of that since it is clear that obtaining the names would allow the agency to identify potential audit targets.
Accountingweb.com also reports: "IRS Strikes Blow Against Attorney-Client Privilege."
Steve Pearlstein for the Washington Post had this to say about recent developments regarding the attorney-client privilege: "[T}here are real downsides in terms of erosion of the attorney-client privilege in requiring or allowing lawyers to rat on their clients except in the rarest of circumstances. I'm not sure the costs in terms of that erosion are offset by the marginal benefits you get when you go from reporting up to reporting out." You can access his comments here.
Another op-ed for the Nashville City Paper--"Attorney-client privilege quickly slipping away"--makes the point that the old cliche of "throwing the baby out with the bath water" might well apply here.
Today's Federal Register contains the final regulations relating to golden parachute payments under section 280G of the Internal Revenue Code. The regulations which were mentioned here last Friday incorporate changes and clarifications to reflect comments received concerning the proposed regulations, primarily in these areas: the small corporation exemption, repayment of the excise tax, and the definition of change in ownership or control.
News regarding the IBM and Xerox cash balance plan decisions:
"Pension Rulings Roil Hundreds of Businesses: Companies Seek U.S. Role In Cash-Balance Plans.": Ellen E. Schultz for the Wall Street Journal reports today. The article discusses both the IBM and Xerox cash balance plan decisions handed down late last week. (You can access previous discussions on the IBM case here and previous discussions on the Xerox case here). With respect to IBM's plans to appeal, the article makes the point that employers will have reason to worry since the IBM appeal "will be heard in the Seventh Circuit, where it may be decided by one or more of the judges who just ruled against Xerox on appeal. These include Judge Posner, a highly regarded judge whose opinions have been cited by the Supreme Court, and a prolific writer of Erisa decisions that have had substantial impact."
Deepa Babington for Reuters has this: "IBM ruling turns promising pension move into headache."
Milliman USA has issued this Client Action Bulletin: "Emerging Developments for Cash Balance Plans."
Stephen Taub for CFO.com also reports: "Court Decision Big Blow to Cash-Balance Plans."
News regarding pension funding and accounting:
David Reilly discusses pension accounting and pension deficits in the U.K. in today's Wall Street Journal: "'How Much?' Is Just First Issue On Companies' Pension Deficits."
Dennis Cauchon reports for USA Today in an article entitled: "Pension peril hits W.Va. hardest." The article states that "the West Virginia teachers retirement system is the worst-funded public pension fund in the nation" and that it "has only 19% of the assets needed to pay current and future benefits." Another article for USA Today reports: "State pensions face loss of billions."
Lawrence B. Lindsey and Marc Sumerlin for the Washington Post make some very interesting comments regarding the pension funding crisis in this op-ed: "Herbert Hoover Pension Rules." The article makes the point that "[j]ust as the government works to discourage contributions during good times, it also forces companies to make excessive payments during bad times." Regarding fixes to the problem, the article states: "The best way to get out of any hole is to stop digging. Proposals in this area must specifically preempt collective bargaining contracts that allow pension benefits to rise automatically, even though the plan is underfunded and the company is in trouble."
"The Next Scrambled Nest Egg? Companies are struggling to meet their pension-plan obligations, and Washington is starting to worry. How your retirement plan could be at risk": Jyoti Thottam for Time Online reports.
News regarding health care:
Finally, "Mandated employer health insurance gains support" in California, reports Kathy Robertson for the Sacramento Business Journal via MSNBC.com. Richard Costigan, a lobbyist for the California Chamber of Commerce, states that if the legislation is passed it will create a Pandora's box on many levels, one of which is ERISA which makes self-insured plans exempt from state insurance laws.
"Benefits squeeze eats away at paychecks: This is not 'just a benefits issue, it's a business issue'": Mark Schwanhausser reports for the Mercury News. The article reports companies are attempting to pare down benefits costs--by reducing company matches in their 401(k) plans and by forcing workers to pay more of a share of their health care costs. The article discusses how health care costs can be "the difference between reporting a profit or loss." Edward Lehman, a senior benefits consultant with Watson Wyatt, is quoted as saying that "[u]ntil 2003, it didn't really hit the CFO's or CEO's radar screen'' and how now "[i]nstead of being just a benefits issue, it's a business issue.'' The article predicts more paring back as companies asses the impact of the costs of their underfunded defined benefit pension plans.
Today's Federal Register.
The IRS issued Revenue Ruling 2003-98 which provides guidance concerning the application of section 83 of the Internal Revenue Code where stock options are granted and the company granting the options is later acquired.
The University of Pennsylvania's Wharton School Newsletter has published this article of interest: "Underfunded Pensions: Causes, Cures and Questions."
"Our pension mess could be worse.": the article by Janet McFarland for Globe and Mail talks about how the Canadian "pension plan mess" is better off than the U.S. "pension plan mess." The article highlights how Canadian companies seem to be using more realistic assumptions for future investment returns than U.S. companies.
USA Today reports: "Stock options showdown will affect future of U.S. economy." The article talks about research by economist Stephen Bryant and his colleagues, published in The Journal of Business in October 2000, which found that, unlike options, "restricted stock, due to its linear payoffs, is relatively inefficient in inducing risk-averse CEOs to accept risky, value-increasing investment projects."
Also, regarding another article in the Wall Street Journal reported on here--"Most Workers Are in Dark on Health of Their Pensions: US Airways Killed a Plan That Pilots Had No Inkling Was in Financial Danger" (a change in the title has occurred since the article was published--the article is now entitled "Firms Had a Hand in Pension Plight"), today's Wall Street Journal carries a response from David N. Siegel, President and CEO of US Airways: "The Pension Fund War at US Airways." (Subscription required.) The hard copy edition of today's Wall Street Journal also carries an additional comment from a retired US Airways pilot.
Today's Federal Register.
Cigna is selling its $2 billion pension business as reported by Bloomberg.com: "Cigna Hires Goldman to Sell Pension Unit, People Say."
Norman Cohen for FT.com reports: "Arcane actuarial science widens political divide over pensions." The article quotes Steven Kandarian, the chief executive of the PBGC, who in a speech last week, outlined four choices for policymakers considering the future of the PBGC:
The first option, he says, is to do nothing. The second and third options, increasing substantially the premiums paid by healthy employers or significantly increasing company contributions, are likely to be aggressively opposed by employers. The fourth, diplomatically described as "general revenue transfer" - a bailout by the taxpayer - is unlikely to win the support of the Bush administration.
In the meantime, Sun Microsystems Inc. is granting stock options to a number of senior executives as reported by Reuters: "Sun grants stock options to CEO, other executives." The article reports that the news came even after "shares of Sun fell 19 percent after it reported quarterly earnings below Wall Street expectations and analysts wondered when it might recover from the technology spending downturn."
On the other hand, today's edition of the Wall Street Journal is reporting: "Companies Get Stingy With Stock Options: Many Employees Will Find Their Awards Sharply Reduced; When to Cash In Old Ones." (Subscription required.)
Today's Federal Register.
Rachel Emma Silverman for the Wall Street Journal has this article: "Retirement Plans Reduce Choices: After Years of Expanding Investment Options, Companies Decide Fewer Funds May Be Better." (Subscription required.) The article reports how "there is an emerging sense that employees may actually be more inclined to put money in their retirement plans if they have fewer choices." (See previous post on this subject here.)
The New Jersey Star Ledger has this article: "The lump-sum pension vs. a check-a-week for life." The article discusses how the lump sum payment option for participants right now is more attractive due to the low interest rates which can produce higher lump sum amounts, but that if Congress enacts proposed pension legislation, lump sum amounts would be reduced making this option less attractive for retirees.
Regarding the status of the proposed pension legislation which was approved by the House Ways and Means Committee week before last, this U.S. Newswire reports that "to the dismay of Democrats and at least one prominent Republican, the House Ways and Means Committee has not indicated that it will schedule another markup" of the bill even though it "served as the backdrop of one of the most bitter, partisan congressional debates in recent history."
For a look at how participants of U.S. Airways are coping with the fact that their pensions have been downsized under terms of the distress termination by the PBGC, read this article by Jerome R. Stockfisch in the Tampa Tribune: "Broken Promises."
Today's Federal Register contains temporary and proposed regulations concerning requirements for employee stock ownership plans (ESOPs) holding stock of S corporations. The regulations provide guidance on identifying disqualified persons and determining whether a plan year is a nonallocation year under Internal Revenue Code section 409(p) and on the definition of synthetic equity under Internal Revenue Code section 409(p)(5).
Several news sources are carrying this Associated Press article today (this one via ABCNews.com): "Don't Fret Over Pension Notice: Don't Immediately Fret Over Notice From Employer of Underfunded Pension."
Stephen Taub for CFO.com provides this report: "Ways and Means of Relieving Underfunded Pensions: Committee's recommendation to full House of Representatives may ''free up cash for other corporate uses.'' The article reports that shortly after the announcement that the Portman-Cardin bill had passed the Ways and Means Committee, Standard and Poor released a statement that its estimate of pension underfunding for the S&P 500 is under review. You can read the press release here. The press release provides:
"If the House approves the proposed three-year use of the high-grade corporate bond rate, which is currently yielding 128 basis points higher than the 30-year Treasury, the amount of pension underfunding among U.S. companies would significantly decrease, resulting in lower corporate contributions to their pension funds. . . This change would free up cash for other corporate uses."
Business Week Online provides this op-ed by Steve Hamm: "Commentary: Expense Options--but Give Startups a Break." The article discusses how FASB is open to creating special rules for Pre-IPO nonpublic companies.
Albert Crenshaw for the Washington Post discusses "bottom-up leveling" in 401(k) plans in this article: "How a 401(k) Loophole for the Rich Can Mean a Windfall for the Poor."
Susan Tempor for the Detroit Free Press writes: "Tax law changes add 401(k) quirks."
Articles on the events of yesterday regarding the House Ways and Means Committee mark-up of the Portman-Cardin Bill (HR 1776):
The most important statement, in my opinion, came from the Washington Post article:
The bill passed the committee with no Democratic votes. "I've been here nine years, and this is one of the saddest days we've had in the House," said Rep. Ray LaHood (R-Ill.). "What has happened to the Democrats is shameful; it's embarrassing to our party. I'm sad for our party, and I'm sad for the House."
The Post also reports:
"This is simple, serious and sad," said Ways and Means member Nancy L. Johnson (R-Conn.), adding that both parties made mistakes that were "destructive to the body."
Ironically, the Post also reports that many Democrats support the "bill that sparked yesterday's furor."
Thanks to a reader for alerting me to what went on today on Capitol Hill regarding the debate over the Portman-Cardin bill (HR 1776). Several news sources are reporting that the Capitol Hill police were called Friday morning to a Ways and Means Committee markup after Democrats stormed out and locked themselves in a nearby library room to protest the GOP's handling of the bill. You can read about it in this article from the Wall Street Journal: "House Committee Passes $50 Billion Pension Bill." Also, Reuters via Yahoo! News reports--"House Panel OKs Pension Fix Amid Acrimony"--and the Dow Jones Newswire also via Yahoo! News reports--"US House Panel OKs Pension Formula Fix, 401(k) Boost."
UPDATE: Another article regarding the day's events via the Washington Post: "House Democrats Storm Out of Ways and Means Committee Chairman Calls Capitol Police to Restore Order."
FURTHER UPDATE: This statement from Treasury Secretary Snow on action taken by the House Committee on Ways and Means.
The New York Times has this op-ed by Peter Fisher regarding pension funding: "Will Congress Let Accounting Fiction Obscure Pension Reality?"
"U.S. execs oppose more pension disclosure": Reuters reports via Forbes.com.
Susan Kelly at Treasury & Risk Management reports on the importance of 401(k) participant education: "Seek Directions: A rough ride from the markets is prompting 401(k) participants to demand advice." The article reports Ann Longmore, fiduciary liability practice leader at insurance broker Willis Group Holdings, as saying that companies that are currently being sued in relation to company stock holdings in 401(k) plans would have been in a better position had they provided participant advice because the employees that are suing would have far less sympathy "if they were told by a professional that it’s not in the best interest of their portfolio to have such a concentration.” (Comment: I am all for participant education, but diversification does not seem to be the focus of the class action lawsuits--rather the focus is on the ERISA fiduciaries and their failure to disclose to participants certain crucial information about the company's financial well-being.)
Today's Federal Register contains some non-benefits tax-related regulations:
Blogs are the subject of this op-ed in the Wall Street Journal today: "The Blog Shall Make You Free." (Subscription required.) The op-ed talks about the impact blogs are having in Iran and the story of Iranian journalist Sina Motallebi, apparently arrested for the crime of blogging. Glenn Reynold's Instapundit is mentioned in the article.
The Wall Street Journal also reports: "House to Consider a Pension Bill Based on Corporate-Bond Rates." (Subscription required.) The article reports that the House Ways and Means Committee today is expected to take up legislation to establish a temporary benchmark for calculating a company's pension-fund liability, as part of a broader effort to overhaul federal-pension rules.
This lively Wall Street Journal op-ed discusses what the auto industry is facing as it negotiates with unions over health care benefits: "Detroit's Health-Care Tar Pit." (Subscription required.)
Today's Federal Register contains proposed Internal Revenue Code section 401(k) and 401(m) regulations and final regulations pertaining to Internal Revenue Code section 419A(f)(6) plans. There will be more discussion of these regulations later . . .
The Federal Register also contains final regulations relating to a qualified subchapter S trust election for testamentary trusts under section 1361 of the Internal Revenue Code.
Bloomberg.com provides this report: "Warren Buffett Says That Pension Accounting Encourages Cheating."
Mary Deibel with Scripps Howard News Service for the Albuquerque Tribune Online reports: "Proposed changes in pension plans draw fire."
"Ernst Clients Face IRS Audits Over Stock Option Tax Shelters" reports Bloomberg.com.
Jill Elswick for BenefitsNews.com reports: "No Fun with Funds." The article tells us that according to the Profit Sharing/401(k) Council of America some 36% of plans do not have an investment policy statement. The article also provides some practical information for ERISA plan fiduciaries on techniques for retiring poorly performing 401(k) options.
Another good article from BenefitNews.com: "Auto rebalancing simplifies 401(k) asset reallocation." The article explains how automatic rebalancing is being added as a feature to 401(k) plans to help participants in meeting their investment goals. And this article from BenefitNews.com also reports on what many practitioners have known for a long time: "Workers and employers badly informed about retirement saving."
"The Pension Time Bomb": Robert Samuelson says it's ticking in this op-ed for the Washington Post.
Rob Wells in today's edition of the Wall Street Journal reports: "Bush Plan on Pension Funding Hits Resistance at House Hearing." (Subscription required.) Members of the House Ways and Means and Education and Workforce Committee expressed concern that the Bush plan might increase volatility in pension plan funding, causing companies to terminate their plans. The article quotes Rep. Earl Pomeroy (D., N.D.) as saying to administration officials: "Your worker protections are going to protect the workers right out of their pensions."
Also, David Wessel has this op-ed for the Wall Street Journal: "The Politics of Pension Promises." (Subscription required.) Mr. Wessel boils it all down to this:
Tweak the rules to make it easier for companies to make promises, even if that allows them to set aside less money in coming years to back pensions and pretend plans are sounder than they truly are? Or tweak the rules so that companies have to do more to stand behind their promises, including setting aside more money and revealing more financial data to workers?
USA Today provides this op-ed: "Workers deserve to know when pensions are at risk."
Finally, you can read the following testimonies offered yesterday before the U.S. House of Representatives Committee on Ways and Means, Subcommittee on Select Revenue Measures (via Benefitslink.com):
Today's Federal Register.
Federal Reserve Chairman Alan Greenspan spoke to the House of Representatives Financial Services Committee today. The main point of his speech, according to Reuters via Yahoo! News as reported in this article--"Greenspan Vows Low Rates, Sees Recovery"--was that he vowed to keep U.S. interest rates low for a long time, but said that the economy "could very well be embarking on a period of extended growth." Forbes reports in this article--"Greenspan: Bush admin pension proposal is an advance"--that Greenspan also addressed the Bush administration pension funding proposal and called the proposal "an improvement," but said that problems remain including company pension rules from the Internal Revenue Service and the Financial Accounting Standards Board that are "more complex than we need."
Also, Christine Hall for CNSNews via Crosswalk.com reports: "White House, Congress Tackle Pension Quandary."
The Washington Post has this op-ed: "Fixing Pensions." The article calls for working out an "approach based on factual, accurate projections of future costs, not convenient fictions that may boost corporate profits now but create more problems down the road."
"Employees vs. executives: BellSouth, Scientific-Atlanta sued over management of company retirement plans": MSNBCNews reports that ERISA lawsuits have been filed against BellSouth Corp. and Scientific-Atlanta Inc. The article mentions the Enron and Worldcom lawsuits (which have been discussed here previously) and how all of these cases have brought an increased focus on the role of ERISA fiduciaries. The article also mentions the trend, particularly among the airline industry, of hiring independent fiduciaries to oversee plan investment decisions to avoid having the executives make these decisions "with all the conflict of interest that entails."
Some good news from CNNMoney.com: "Coming soon: Gains in your 401(k): A strong quarter for stocks should translate into more money in your retirement plan."
Today's Federal Register.
The Boston Globe reports today, regarding Microsoft's decision to end its stock option program: "No rush yet to abandon stock options: Firms that hope to grow see them as worker lure." The article reports that "[w]hile some area technology companies say they are considering a plan to phase out stock options in favor of more stable restricted stock awards, most said they did not plan to change the way they compensate employees in the immediate future."
USAToday, however, reports: "Citigroup doing away with stock options."
Lisa Bowman for CNET News.com writes a very good article discussing the future of stock options via ZDNet.com entitled, "Stock options: End of an era?" The article reports that, based upon an internal memo, Microsoft employees at a certain level--who would normally be given 1,320 options--will get 325 restricted stock awards under the new Microsoft program. The article reports compensation experts as saying that the award is in line with a typical industry ratio of one share grant for every three or four options. In addition, the article quotes Martin Staubus, director of consulting for the nonprofit Beyster Institute for Entrepreneurial Employee Ownership, as stating that companies will increasingly turn to a "smorgasbord of incentives--including options, stock grants, cash and even souped-up retirement plans--rather than follow any single trend as they did with stock options in the 1990s."
Today's edition of the Wall Street Journal provides this article by Matt Murray and Lee Hawkins Jr., regarding House and Senate bills pertaining to Medicare prescription drug benefits: "Employers Will Face Many Choices, Including Trimming or Cutting Out Prescription Programs for Retirees." (Subscription required.) The article reports that the "Congressional Budget Office has estimated that 37% of retirees now covered by a company plan would lose employer-provided drug benefits under the Senate bill, and 31% under the House proposal."
Also, this by Mick Wingfield from the Journal: "Shift in Stock Options May Be At Expense of Accounting Purists." (Subscription required.)
Finally, Alwyn Scott for The Seattle Times via NewsAlert.com has this article: "Some Analysts Fear Long-Term Consequences of Plan to Erase Pension Shortfalls" The article quotes some as saying that the proposed Bush administration pension funding changes (which you can read about here under Benefitsblog's Pension Funding archives) are mere "accounting wizardry" or "hocus-pocus" while others say it is badly needed in this economy to preserve the defined benefit plan as a viable retirement program which companies will be willing to continue.
I enjoyed Nevin Adams' op-ed today at PlanSponsor.com--"IMHO: Reality "Check? It's hard for plan sponsors to catch a break in the headlines these days" responding to this Wall Street Journal article which you can now read at SFGate.com and which was discussed here yesterday.
Watson Wyatt provides an article on the pension funding crisis in the Watson Wyatt Insider--"Pension Plan Sponsors Looking for Funding Relief from 'Perfect Storm' Conditions"--which recommends legislation to ease the funding situation. The article states that "contribution amounts will be significant and burdensome, and relaxing funding requirements somewhat could help plan sponsors keep their plans afloat in these stormy economic times, which would certainly benefit plan participants as well." The article also suggests that "[e]xtending the current JCWAA relief for another two years or adopting the higher rates proposed in Portman/Cardin would go far in providing plan sponsors with the funding relief they sorely need right now."
Much has been written about the whole pension funding crisis and, with the Bush administration's proposal discussed here yesterday, came a front page article from the Wall Street Journal--"Firms Had a Hand in Pension Plight They Now Bemoan: Relying on Arcane Rules, Some Have Drawn Down Assets for Corporate Purposes: Now, Asking Congress for Relief." The article is critical of companies which the Journal says have "siphoned off billions of dollars in assets from their pension plans" using the "cash to pay for retirees' health coverage, the costs of laying off workers and even fees to benefits consultants." The article is also critical of "benefits consultants" which it says have "guided companies through the labyrinth to find ways to tap the huge pension surpluses the bull market wrought."
My thoughts on the subject:
Today's Federal Register.
Regarding the Bush administration's proposal (discussed here yesterday) addressing pension fund shortages, Christine Dugas for USA Today writes: "Treasury plan could slash pension payouts ." Several things from the article worth noting: On July 15, the House Education and the Workforce Subcommittee on Employer-Employee Relations will hold a hearing on the proposal. Regarding lump sum payouts under the proposals, the rules would not affect lump sum distributions in the first two years, but during the next three years, a new formula gradually would be phased in that would be based on a corporate bond yield curve matching the age and tenure of the workers in a plan which would generally result in lower lump sum payouts.
Another article by Corbett B. Daly for CBS MarketWatch--"Congress reacts to Bush pension plan"--reports how members of Congress and others are reacting to the pension funding proposal. According to the article, the American Benefits Council has called the plan "unnecessarily complex." ABC President James Klein is quoted as saying that "[t]here are serious concerns with the administration's proposal" and that "using a yield curve for valuing pension liabilities would inject needless volatility and complexity in pension funding." He argues further that "increased volatility in particular would hurt defined benefit plan sponsorship at a time when the pension system needs strengthening."
More on the Bush pension proposal: Alan Beattie provides this report on the subject for the Associated Press via FT.com and Yahoo! News: "Mixed greeting for Bush pensions plan" and John D. McKinnon for the Dow Jones Business News via Yahoo! News writes: "Bush Pension Plan Seen Offering Transition Period." Also, this from Forbes.com by Ari Weinberg: "White House Throws Pensions A Curve."
The front page of today's edition of the Wall Street Journal has this article by Ellen Schultz and Theo Francis: "Most Workers Are in Dark on Health of Their Pensions: US Airways Killed a Plan That Pilots Had No Inkling Was in Financial Danger." The article reports that "[o]ne source of pension information, company filings to the Securities and Exchange Commission, is of little use to employees" because most big companies have multiple pension plans which are lumped together in their filings. The article reports that without adequate information, employees and retirees face a risk that the employer "can mask the deteriorating health" of the plan and "take steps to cut benefits or kill the plan" or on the other hand, exaggerate the ill health of the plan "to justify reductions in retirement benefits." The article discusses in detail how the latter is what happened in the US Airways case.
The IRS recently issued Revenue Ruling 2003-83 which provides guidance on reasonable funding methods for pension plans. (Also, via Benefitslink here.)
Today's edition of the Wall Street Journal contains these three articles on pension funding and accounting:
Lou Dobbs has this article for USNews.com: "Retirement realities." The article warns that there is a "retirement crisis" in America and urges "individuals, policymakers, and corporate decision makers alike to work toward a solution."
The New York Times calls pension accounting a "dismal science" in this article by Mary Williams Walsh: "Pension Reserve: What's Enough?" The article discusses the lobbying efforts going on in Washington for relief for certain industries from the pension funding rules. The article states that "[a}lways on the minds of pension policy makers is General Motors, whose $25 billion worldwide pension deficit is larger than its market capitalization of $21.8 billion." The Business Roundtable in this letter warns Congress that the whole economic recovery may be at stake if Congress does not provide relief. The letter states: "Companies cannot commit to building new plants, launching new research projects, or hiring new employees if that cash is needed to fund pensions."
Today's edition of the Wall Street Journal has this important article (subscription required) by Jesse Drucker and Theo Francis: "Pensions Fall--Not CEO's Bonus." The article discusses how in good times, pension surpluses helped to boost corporate earnings which in turn increased executive compensation under executive bonus plans which were tied to net income. However, now that pension plans are underfunded, with many companies having to pump money into their pension plans, companies have been inserting special language into their bonus plans so that bonuses can continue to be paid, despite earnings, according to the article. The article quotes Carol Bowie, director of governance research at the Investor Responsibility Research Center, a Washington research and advisory firm for institutional investors as saying, "This pattern where pension surpluses are included for bonuses but pension expenses are excluded just underscores how these incentive programs can be manipulated in order to maximize payouts." The article quotes a Verizon spokesman as saying that their executives have always been compensated "based on operational performance and strategic factors" and not based on "losses or gains in the pension fund."
Today's Federal Register is here.
"Avoiding Pension Plan Time Bombs": this article by Fei Mei Chan for Forbes.com discusses the pension plan funding issues facing S&P 500 companies.
Vinod Khosla speaks out for stock option expensing in this article for SiliconValley.com: "Expensing options at big firms could boost innovation at startups."
AccountingWeb.com reports on congressional support for the "Broad-Based Stock Option Plan Transparency Act" which was introduced in March by Rep. David Dreier (R-Calif.) and Rep. Anna Eshoo (D-Calif.): "Congress Gains Support in Stock Option Fight."
This article by John Snow for the Business Journal--"Humana rolls out swipe card"--reports that Humana Inc., in conjunction with Evolution Benefits Inc., MasterCard International and BankFirst, is offering a combined identification card and prepaid MasterCard for accessing funds in flexible spending accounts. The new program takes advantage of a recent ruling by the Internal Revenue Service, Revenue Ruling 2003-43 (via Benefitslink), which "blesses" such programs. (The ruling was discussed in previous posts here.) The article reports Humana Inc. as stating that a 60% increase in flexible spending account enrollment occurred as a result of adopting the "swipe card" program.
The PBGC provides this Interest Rate Update.
Today's Federal Register is here and contains the PBGC's interest assumptions for valuation dates in July, 2003.
This very important news--"House approves new tax-cut package; Measure includes extension on child tax credit'--from Ted Barrett for the CNN Washington Bureau at CNN.com. The article reports that the White House has expressed support for both the House and the Senate versions of the bill. The article also reports that a White House statement released Thursday urged congressional leaders to "quickly resolve their differences." Today's edition of the Wall Street Journal reports Republicans as saying that "the White House is eager to put the matter to rest, and beyond the fix, cares little about specifics," but also reports that "prospects look bleak for a quick resolution."
A very good article by Sandra Block at USAToday discusses the practical effect of JAGTRRA for married couples--"Tax cut may enhance wedded bliss."
An article by Michael Kaye discusses overfunded pension plans at BusinessWeekOnline: "Plenty in the Pension Pool: These 10 companies have well-funded retirement plans, and they're highly rated by S&P analysts."
"Candidate Edwards Calls for Pension Reforms": this article at MercuryNews.com by Mike Glover discusses Democratic presidential candidate John Edwards' comments in Iowa on his proposals for pension reform to correct what he calls pension inequities.
This article from the U.S. Newswire: "Snowe, Colleagues Take Aim at Attorney General's Effort to Block Expansion of Health Care Plans for Uninsured."
This article by David M. Katz at CFO.com: "Needed: $36 Billion in Pension Contribution; Pension plans of S&P 500 vastly underfunded; same story for federal agency that backstops pension plans." The article cites a report by FTI Consulting which examined GAAP pension data and disclosures for fiscal 2002, and found that 19 of the S&P 500 companies' pension funding requirements will "top 30 percent of their most recent fiscal year's free-cash flow."
Today's Federal Register is here.
It really is true that the IRS is becoming more user-friendly! They have published today in their online version of their Employee Plan News the following:
New Revenue Procedure 2003-44
A red-lined version of the Revenue Procedure
A Chart comparing the substance of the old Revenue Procedure (Rev. Proc. 2002-47) and the new Revenue Procedure (Rev. Proc. 2003-44)
A topical index to the Rev. Proc. (very handy when it comes to trying to find something in that voluminous document!)
And, yes! it's true!, a powerpoint presentation of the changes made to EPCRS by this new Rev. Proc.
Also, coming this summer, says the IRS is a new Correction Programs CD-ROM with video clips and a comprehensive overview of the program.
More on pension funding with this article at PlanSponsor.com regarding a report by Credit Suisse First Boston (CSFB) Corp. accounting analyst David Zion who sees the decline in interest rates as being the main reason behind the whole pension funding crises. More on the report by Arden Dale for the Associated Press at SFGate.com.
Today's Federal Register is here. Elizabeth MacDonald for Forbes Magazine reports via Yahoo! News.com: "Pension Pangs: Some big companies are in for an earnings jolt when they own up to the reality of rotten pension fund performance."
Reuters has reported that the House Subcommittee on Capital Markets will hold a hearing, entitled "The Accounting Treatment of Employee Stock Options," on June 3, 2003.
Louis Lavelle for Business Week Online offers this commentary: "Shareholders Unite to Expense Options."
Benefitslink.com points us to this insightful article by Accounting Today--"GAAP for pensions: Sanctioned fraud must go"--and this article by Fred Reisch for PlanSponsor.com--"Doing Well While Doing Good"--which talks about the selection of socially responsible funds as an 401(k) plan investment option.
TRI Pension Services reports in its Recent Developments on the Field Assistance Bulletin issued by the DOL regarding allocation of expenses to participants and also reports on the new deemed IRA regulations.
This very insightful article by Elizabeth MacDonald at Forbes.com via Yahoo! News quotes Michael D. Hirsch, senior portfolio manager at Mony Group Advest investment unit, as saying that the "market has not yet priced in the pension hits about to come" and that "financial dislocations" still await us with respect to the whole pension funding problem facing a multitude of companies.
Today's Federal Register is here. The U.S. Department of Labor has announced proposed rules clarifying the requirements for notices under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for employees, employers and plan administrators. The proposal provides guidance and model notices for workers and family members to continue their group health care coverage and is scheduled to be published tomorrow in the Federal Register. A fact sheet on the proposal is available on EBSA's website here. James Mackintosh discusses the benefits to GM from the proposed Portman-Cardin Bill currently before the House of Representatives in this article for FT.com. Predictions of a "demographic tsunami" are here in an article by Marilyn Geewax of the Palm Beach Post Washington Bureau at PalmBeachPost.com: "Pension system on shaky ground." The New York Times reports that an estimated 300,000 French workers, teachers and students marched Sunday in protest against their government's plans to extend the period of service required for a guaranteed pension from 37.5 years to 40 years.
Thompson Publishing provides a very good article discussing the implications of the U.S. Supreme Court case Kentucky Association of Health Plans, Inc. v. Miller, 123 S.Ct. 1471 (S Ct., April 2, 2003) which ruled that a state's any-willing-provider (AWP) laws are not preempted by ERISA. The article discusses the possible fallout from the case and predicts that states will now be free to enact laws regulating TPAs and other service providers under the guise of "insurance" regulation.
Another article for Thompson Publishing authored by Joseph Adams, Esq., of Deloitte & Touche, LLP, discusses the recent trend of companies seeking to meet their funding obligations of defined benefit plans with in-kind contributions of stock and the exemptions being contemplated for such transactions by EBSA.
More here about the debate over mortality assumptions for blue collar workers going on in the House with respect to the Pension Preservation and Savings Expansion Act of 2003 (HR 1776) also known as the Portman-Cardin Bill. A response by the American Academy of Actuaries to the debate has been issued. The Academy makes the point that it has not been consulted regarding the recent push for different mortality assumptions for blue collar workers and that if a different table is used, well-paid union workers (such as airline pilots) should be excluded from the definition of "blue collar workers" (since the income level is seen as an age determining factor, lengthening life expectancy.)
The New York Times reports today that the House of Representatives is considering measures that would allow assumptions to be made for purposes of pension calculations that blue collar workers do not live as long as white collar workers. The New York Times says that the assumptions are based upon a study performed by a committee of the Society of Actuaries which studied and analyzed 11 million "life years" and concluded that blue collar workers and the poorly paid both tend to die young. The findings are being used to support a bill pending in the House which would allow businesses with union workers to reduce their company pension obligations. The United Auto Workers are supporting the provision. (Other articles on the subject by CBSNews.com,FindLaw, and Reuters at Forbes.com.)
In the news today, the Washington Post reports that the Pension Benefit Guaranty Corporation disclosed yesterday that it has a deficit of $5.4 billion, as opposed to a surplus of $7.7 billion just 18 months ago. The Associated Press reports here that more than half of the 32,000 traditional pension plans offered by private employers are underfunded. This in turn relates to the debate going on over how to value pensions in the first place. CFO.com has an article which reports that officials at the Treasury Department believe changes need to be made in the way pensions are valued. A bill sponsored by Rob Portman (R-Ohio) and Benjamin Cardin (D-Md.) would increase the discount rate which is used for determining pension fund obligations and is currently being debated. The New York Times also reports on the subject.
A report by the S&P 500 indicates 2002 pension figures show that continuing bear markets have resulted in pension shortfalls for 308 companies. Only 35 reported surpluses, among which are AT&T Corp., General Mills, Prudential Financial, and Verizon Communications. The 2002 S&P's Core Earnings bore the impact of the bear market with pension adjustments taking $8/share of earnings.
In connection with a hearing scheduled by the House Committee on Ways and Means for April 30, the Joint Committee on Taxation has issued a report entitled Present Law and Background Relating to the Funding Rules for Employer-Sponsored Defined Benefits Plans and the Financial Position of the Pension Benefit Guaranty Corporation ("PBGC"). The Committee will be addressing the underfunding issues related to defined benefit plans which is currently causing such great concern for so many companies.
An article by Plan Sponsor.com highlights how litigation in the pension plan arena will continue to be on the rise. A Dow Jones Report indicates the Center for Economic and Policy Research did a study, commissioned by the United Steelworkers of America, which criticizes pension fund managers for continuing to invest in equities during the late 1990's. The study analyzes Federal Reserve Board data and estimates that public and private pension lost more than $1 trillion since 1997. The study accuses pension fund managers of failing to monitor investments closely enough.
The Wall Street Journal reports in an article that, even though many qualified pension trusts are underfunded due to the weak stock market and low interest rates, a number of companies are funding their nonqualified pension trusts for executives.