September 17, 2014
- House Subcommittee Discusses Defined Benefit Plans
- Senate Passes Legislation Clarifying Defined Benefit Plan 'Shutdown' Procedures
House Subcommittee Discusses Defined Benefit Plans
The U.S. House of Representatives Ways and Means Subcommittee on Select Revenue Measures discussed numerous issues related to defined benefit plans in a September 17 hearing. Among the witnesses testifying before the panel from Council member companies were Deborah Tully, director of compensation, benefits finance and accounting analysis at Raytheon Company and Scott Henderson, Vice President of Pension Investment and Strategy, The Kroger Co.
The Council, in a media statement issued in conjunction with the hearing, affirmed that defined benefit pension system “delivers enormous value to participants, but sponsorship is discouraged by policies that fail to recognize the long-term nature of pension obligations.” The statement also lists a number of needed improvements in the regulatory environment for defined benefit plans.
In a statement announcing the hearing, Subcommittee Chairman Pat Tiberi (R-OH) said, “I have heard for years now from hundreds of businesses and nonprofits about the need for pension reforms, especially for defined benefit plans. Increasing pension costs have hampered both the job growth and capital investment needed to grow the economy and have threatened retirement security for American workers.”
Tully’s testimony described Raytheon’s transition from a primarily defined benefit model to a primarily defined contribution model, with longer-service employees remaining in the defined benefit system. In particular, Tully described how the “soft freezing” of defined benefit plans (closing them to new entrants) has created new challenges for employers. Unfortunately, certain “grandfathering” approaches have inadvertently run afoul of current regulations prohibiting discrimination in favor of highly compensated employees.
Tiberi and Ranking Subcommittee Democrat Richard Neal (D-MA) have introduced legislation (H.R. 5381) that would address the inadvertent harmful effects of ERISA’s nondiscrimination rules on plans that grandfather some or all of a defined benefit plan’s existing participants from changes to the plan. Tully voiced her support for the legislation[.]The Council also supports the legislation.
Henderson, in his testimony, described the stark challenges facing multiemployer plans and the multiemployer pension fund, which in turn threatens the solvency of the Pension Benefit Guaranty Corporation. He urged Congress to take action as soon as possible to reform the current multiemployer funding rules, which expire at the end of this year.
Henderson specifically encouraged immediate congressional action to adopt the measures suggested by the National Coordinating Committee for Multiemployer Plans (NCCMP) in its report titled “Solutions not Bailouts.” The Council also continues to support efforts to address the challenges confronting multiemployer plans.
The committee also heard testimony from the following individuals:
- R. Dale Hall, managing director of research at the Society of Actuaries (SOA), discussed the process by which his organization developed new mortality table standards. In February, the SOA Retirement Plans Experience Committee released an exposure draft of the Mortality Improvement Scale MP-2014 and an exposure draft of the RP-2014 mortality tables. SOA’s mortality assumptions are frequently used by the government for purposes of plan funding, benefit restrictions, PBGC premiums and other related purposes. In a May 30 letter to the SOA, the Council expressed support for a more cooperative and collaborative review of these standards. Recently, the SOA indicated that the tables would be released this fall. This will have an immediate impact on defined benefit plan sponsors.
- Jeremy Gold, an independent consulting actuary and economist, focused on the measurement of liabilities and costs of multiemployer pension plans. He suggested that current multiemployer plan liabilities have been understated and prevailing actuarial assumptions have been too optimistic, and recommended more transparent and accurate estimates of future costs.
- Diane Oakley, executive director of the National Institute on Retirement Security, lamented the relative decline of defined benefit plans. She expressed support for measures to sustain defined benefit plans and preserve Social Security.
The question-and-answer period focused largely on the multiemployer plan crisis, with Tiberi and representatives Kenny Marchant (R-TX), Alyson Schwartz (D-PA), Aaron Schock (R-IL) inquiring about the implications of system failure and the potential of the NCCMP proposal to avert such failure.
Tiberi also asked Tully if the Internal Revenue Service’s temporary relief from the nondiscrimination rules, provided under Notice 2014-5, was helpful. Tully expressed appreciation for the temporary relief but said that legislation remained necessary to address the matter permanently.
Rep. John Larson (D-CT) expressed support for defined benefit plans but criticized the lack of access and participation to defined contribution plans. He also asked if proposals to cut Social Security benefits – such as the use of revised cost-of-living measures – should be avoided in light of the apparent retirement savings gap.
Rep. Erik Paulsen (R-MN) asked the panel if companies should be expected to make changes to their plans to avoid the cost increases that would be expected as a result of longer life expectancies. Tully responded that Raytheon is aware of the matter but has no plans to make changes at this time.
Rep. Todd Young (R-IN), in endorsing H.R. 5381, also expressed his support for employee stock ownership plans, which he said were valuable for helping employees accumulate wealth.
Rep. Mike Kelly (R-PA) emphasized the long-term nature of pension obligations and identified a number of other issues threatening the continued viability of defined benefit plans such as dramatic increases in PBGC premiums.
As the Council noted in its media statement, continual premium increases threaten the long-term viability of the defined benefit pension system and PBGC’s plan termination insurance program by driving away employers that present no risk to the system.
Senate Passes Legislation Clarifying Defined Benefit Plan 'Shutdown' Procedures
The U.S. Senate passed a measure by unanimous consent on September 16 to clarify the definition of “substantial cessation of operations” of a defined benefit pension plan sponsor under ERISA Section 4062(e).
The legislation, S. 2511, was previously approved by the Senate Health, Education, Labor and Pensions (HELP) Committee in a closed-door session on July 23 (as we reported in the July 23 Benefits Byte). The measure will now be sent to the House, where a vote in committee or on the House floor is possible before the end of the year.
Under previous law, if an employer with a pension plan shut down operations at a facility – and, as a result of that shutdown, more than 20 percent of the workers who were plan participants were separated from employment – the employer was required to provide the Pension Benefit Guaranty Corporation (PBGC) with short-term financial guarantees in the form of a bond or escrow amount based on the plan's unfunded termination liability. In the past few years, PBGC had enforced this provision of ERISA in a very expansive manner. This had given rise to significant compliance challenges and large unexpected liabilities for many companies that had engaged in normal business transactions (such as the sale of a very small business unit or the consolidation of small operations at different facilities).
S. 2511 will:
- Ensure that there is no 4062(e) event unless there is a substantial shutdown of operations at a facility relative to the size of the entire employer.
- Ensure (subject to certain exceptions) that there is no 4062(e) event unless employees lose their jobs, as opposed to going to work for another employer.
- Significantly reduce the scope of an employer’s liability if there is a 4062(e) event.
The legislation will apply to both prior transactions and future transactions. It is intended to return enforcement to its original purpose, which is to provide a tool for PBGC when a true cessation of operation is signaling a spiraling down of the company’s financial condition.
The Council worked closely with the sponsors of S. 2511, Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Tom Harkin (D-IA) and ranking Republican member Lamar Alexander (R-TN), during the drafting and refinement of the measure. The Council has been extremely concerned that PBGC's enforcement represented a misinterpretation of the ERISA statute and met numerous times with PBGC officials on the matter and submitted comments, including a recent letter to the PBGC Board of Directors.
A summary memorandum, prepared by Davis & Harman LLP, is available on the Council website, providing a more detailed description of the issue and the key provisions of S. 2511 as introduced. The Council hosted a Benefits Briefing webinar on April 24 to discuss in greater detail the challenges with enforcement of the previous law. (Click here for a digital playback of the session.) For more information, contact Lynn Dudley, senior vice president, global retirement & compensation, or Diann Howland, vice president, legislative affairs, at (202) 289-6700.