Copyright 2009 SourceMedia, Inc.All Rights Reserved Employee Benefit News

March 2009

PENSION FUNDING; Pg. 1 Vol. 23 No. 3

1143 words


Pension lifeline too short, experts say

Lydell C. Bridgeford

Near the end of his term last December, former President Bush signed into law the Worker, Retiree, and Employer Recovery Act. The measure - a byproduct of the economic crisis - provides funding relief for defined benefit pension plans and suspends the minimum required distributions for 2009.

WRERA also makes technical corrections to the Pension Protection Act of 2006. Yet some contend that the legislation only scratches the surface in financially helping pension plan sponsors to stabilize their plans amid a recession.

Under the new law, DB plan sponsors are allowed to recognize expected earnings when calculating the value of the plan assets by using the averaging or "smoothing" method, which allows a plan to determine the value of the assets by averaging the fair market value of the assets over 24 months. The resulting value, however, may not exceed 10% of the current market value of the assets.

Before WRERA, federal regulators at the Internal Revenue Service required plan sponsors to use mark-to-market principles when assessing DB funding, which doesn't permit for adjusting the value of the plan to include expected earnings.

Without the new law, experts say pension plan sponsors in the private sector would face increases to their 2009 funding contribution requirement of about 5% of plan assets.

"The smoothing clarification in particular is important because it validates Congress' original intent in passing the Pension Protection Act of 2006, and is especially crucial given recent market volatility," says American Benefits Council President James A. Klein.

Although the law supplies temporary relief and is directionally good, it's not enough in terms of stabilizing pension plan funding, says Stewart Lawrence, senior vice president and national retirement practice leader at The Segal Company, a New York-based HR consulting firm.

More relief is needed, yet it remains to be seen whether pension plans, which are complex, will get the attention of the 111th Congress, Lawrence observes. "DB plan sponsors are fearful that Congress, having passed a pension funding law, will now focus all of its attention on job creation and the wars."

Keeping pension reforms on the radar

ABC, an employer group based in Washington, D.C., recently urged Congress to consider additional pension legislation, arguing that plan sponsors are still feeling the sting of the financial crisis.

According to the group, new legislation should allow a greater percentage limitation with smoothing and extend the amortization of 2008 plan losses, permitting amortization for over nine years, instead of seven years. Moreover, for 2009 and 2010, the amortization payments would be interest-only. Then regular seven-year amortization of the 2008 losses would begin in 2011.

Other proposals included:

* Enact other funding changes to prevent overburdening pension plan sponsors as a result of the current financial market volatility. This could include using a plan's 2008 funding status to determine the 2009 contribution requirements.

* During 2009, all benefit restrictions should be applied based on the plan's 2008 funded status (i.e., the rule currently applicable to the 60% benefit accrual rule should be extended to all benefit restrictions).

"Further pension funding relief is not about asking for a 'bailout,'" says Rick Jones, chief actuary for Hewitt's retirement and financial management practice. "It's about companies requesting additional time to manage their contribution obligations and avoid the extreme steps they may be forced to take in order to sustain their business during the current economic climate."

Regulatory guidance

There are a couple of WRERA provisions that need to be clarified, says Evan Inglis, a chief actuary for the Vanguard Strategic Retirement Consulting Group.

In 2008, many DB plan sponsors adopted a mark-to-mark approach in valuing their assets. "Now with the new provisions, they are able to use smoothing in assessing their assets," Inglis explains.

Currently, DB sponsors must obtain IRS approval to use a smooth-value method. The agency likely will come out with guidance allowing sponsors to use smoothing value without special approval.

Another interesting aspect of the law is the pension plan expense requirement, which explicitly includes expenses related to the plan's maintenance and administration, and PBGC premiums.

"What needs to be clarified in the law is whether investment expenses, such as expenses on consulting fees for investment management are also included in expenses regarding minimum required contribution," Inglis says. Federal regulators will have to clarify whether those type of expenses were intended to be in the definition of "plan expenses."

admin
WRERA also suspends for 2009 the required minimum distribution rule, which requires people over the age of 70 ½ to withdraw money from their 401(k), 403(b) and 457(b) plans or an individual retirement account. (Read more about the RMD suspension in Laws & Regulations on page 54.)

Under the measure, retirees over 70 would not be forced to withdraw funds out of those accounts while the accounts deteriorate due to distressed financial markets. Some retirement analysts note that the law fails to provide relief to seniors who participate in DB plans who must take required minimum distributions in 2009.

"WRERA needs to be corrected immediately, so that all seniors have the opportunity to lower taxes and build up their retirement account," says Brett Goldstein, a pension plan expert at New York-based The Pension Department, a consulting firm.

"By suspending the RMDs in 2009, the [law] was supposed to allow retirement accounts to recover from the stock market crash and lower taxes for seniors. However, many defined benefit plans will not get the same chance to recover as IRAs and 401(k)s, since [DB] plans still have to pay RMDs in 2009," Goldstein asserts. The pension bailout should provide relief for all Americans, not just the ones with 401(k)s, IRAs and 403(b)s.

Other provisions to the Worker, Retiree, and Employer Recovery Act

* Adjustment of transition rules: The law provides that if an eligible plan falls below the applicable funding provision (92% in 2008; 94% in 2009; 96% in 2010; and 100% in 2011,) only the applicable funding percentage of the "funding target" is used to create the "shortfall amortization base."

* Nonspouse rollovers: The legislation clarifies that all plans are required to permit rollovers out of the plan for non-spouse beneficiaries. The requirement is effective for plan years beginning after Dec. 31, 2009, with such rollovers being permissive until then.

* Lump-sum payments by underfunded plans: An underfunded plan is permitted to pay lump sums of $5,000 or less even if such payment would otherwise constitute a "prohibited payment" under PPA due to the plan's funding status.

Source: Vanguard and Sutherland

March 2, 2009

Copyright © 2009 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved.
Terms and Conditions Privacy Policy