The House Ways and Means Committee yesterday approved a bill to significantly change the nation's private pension system, brushing aside Democrats' objections that it would accelerate the exodus of employers from the traditional pension field.
The panel's action clears the measure for the floor action -- the Committee on Education and the Workforce, which has jurisdiction over many aspects of pension law, approved its part of the measure last summer, but the overall prospects for pension reform remain uncertain because of a deadlock in the Senate.
The bill approved yesterday would sharply tighten funding requirements for traditional pension plans -- those that promise a defined benefit at retirement -- curbing loopholes that have allowed many companies, especially those struggling for survival, to become badly underfunded.
Under the bill, companies would be required to meet a funding target each year based on their plan's assets and liabilities, plus any increases in benefits, including normal growth that occurs because workers' salaries rise and their tenure increases.
In calculating liabilities, companies would have to use interest rates that reflect when benefits are likely to be paid. This provision has drawn criticism as unnecessarily complicated, but proponents say it provides a more accurate figure for the costs a company will actually face.
The bill would also shore up the government's pension insurance agency, the Pension Benefit Guaranty Corp., by boosting premiums paid by companies with traditional pensions. And it would make it harder for troubled companies to pay big retirement benefits to executives when workers' benefits are in jeopardy.
The Bush administration and congressional Republicans have been pressing to tighten funding requirements for traditional pensions after a wave of corporate bankruptcies washed over the PBGC, pushing its balance sheet deeply into the red.
Democrats have agreed that funding should be improved, but there has been debate over how much the rules can be tightened without either pushing weak companies into bankruptcy or causing healthy ones to terminate or freeze their plans.
Employer groups yesterday applauded parts of the bill, but cautioned that, if firms are forced to meet the new funding standards too quickly, they will face harsh cash calls that may lead them to freeze their plans. They also complained that an inflexible funding target could result in unpredictable cash demands that companies couldn't plan for.
"The legislation still does not satisfy the needs of [pension] plan sponsors, who must have flexibility and predictability in the funding rules if they are to stay in the system," said James Klein, president of the American Benefits Council, an employer group.
The bill also would specify that a hybrid pension called a cash-balance plan does not violate federal age-discrimination laws. Employers have been asking for that stipulation. However, the provision applies only prospectively, and employers complain it would leave existing cash-balance plans exposed to lawsuits. In a cash-balance plan, each worker has an "account" to which the employer credits a percentage of pay and interest each year. It thus resembles a 401(k), but is funded entirely by the employer and qualifies for PBGC insurance.
The tax-writing Ways and Means panel also included provisions that would eliminate the scheduled 2010 "sunset" of more generous contribution limits and other increased benefits for 401(k) plans, individual retirement accounts and other retirement plans that were enacted in 2001.
These changes, along with liberalization of health-care spending account rules, permanent extension of the Saver's Credit for low-income workers, tax breaks for the purchase of long-term-care insurance, and other tax benefits would cost the Treasury $70.6 billion over the next 10 years, according to the Congressional Joint Committee on Taxation.