Administration Single Employer Pension Reform Proposal

Challenges Facing the Defined-Benefit Pension System

The pension insurance system is broken and threatening workers, healthy plan sponsors, and taxpayers.

There are three keys to fixing the system:

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• Reform funding rules – to induce employers to fully fund their plans

• Reform insurance premiums -- to better reflect costs and risks

• Improve disclosure -- to better inform workers, investors and regulators

Our Goals

• Protect workers

• Avoid a taxpayer bailout of PBGC

Problem: Underfunding Has Skyrocketed...

…and PBGC has fallen into a deep hole

Summary: The Administration Single-Employer Pension Reform Proposal

• One single, accurate measure of liabilities valued according to current duration-matched yield curve of corporate bond rates

• Assumptions that appropriately reflect the plan’s risk of termination

• Plans given a reasonable period of time to reach their funding targets

• Sponsors allowed to make additional deductible contributions during good economic times

• Underfunded plans or financially weak sponsors restricted from increasing unfunded benefits

• Premiums that meet PBGC’s long-term funding needs

• Better disclosure of plan information to workers, markets, and regulators

• Clarify the treatment of hybrid (cash-balance) plans to expand pension options

• Improve PBGC’s standing to enforce contributions on firms in bankruptcy

The Administration Proposal Would Simplify The System By Replacing Multiple Measures Of Pension Liabilities With One Basic Concept

Under The Administration Proposal, A Plan's Funding Target Would Be Based On The Plan’s Ongoing Or At-Risk Liability, Depending On The Sponsor’s Financial Health

In an Ongoing plan, employees are assumed to retire and to choose lump sums as they have in the past. In an At-Risk plan, the rules will assume that employees will take lump sums and retire as soon as they can.

Empirical evidence shows that a firm's time spent in junk bond status is a strong indicator of the likelihood of plan termination.

The Administration Proposal Gives Plans A Reasonable Period Of Time To Address Underfunding

Under the Administration proposal, plans would annually contribute enough to address their funding shortfall over a reasonable period of time.

The Administration Proposal Would Allow Plan Sponsors To Make Additional Deductible Contributions During Good Economic Times

The Administration Proposal Requires Employers To Pay For Additional Benefits Immediately If The Sponsor Is Financially Weak Or Has A Significantly Underfunded Pension Plan

The Administration Proposal Would Reform The PBGC Premium Structure

• Flat rate premiums will be adjusted (initially to $30) to reflect the growth in worker wages since 1991, when the current $19 figure was set. Going forward, the flat rate premium will be indexed for wage growth

• Risk based premiums will be charged to each plan based on underfunding relative to its funding target. The risk-based premium rate will be adjusted periodically by the PBGC’s Board so that premium revenue is sufficient to cover expected losses and improve PBGC’s financial condition

The Administration Proposal Would Improve The Content And Timliness Of Disclosure

The Administration Proposal Would Protect Plans In Bankruptcy

• Allow PBGC to perfect its lien against missed contributions while plan sponsor is in bankruptcy

• Notify participants when plan sponsor files for bankruptcy, including effect on plans

What Is The Administration Doing To Help Employers And Workers Expand Retirement Choices?

• Hybrid plans (e.g., “cash balance” plans) combine the best of defined benefit and defined contribution

  • Plans are portable

  • Employees understand and appreciate benefits

  • Investment risk borne by employer

  • Insured by the PBGC

• Enact the Treasury proposal to a create legal and regulatory environment that supports continuation and adoption of hybrid plans

• Establish Employer Retirement Savings Accounts (ERSAs) that will simplify the rules surrounding employer-provided portable savings plans

• Increase worker access to investment education

• Allow workers in defined contribution plans to diversify out of company stock after three years

Summary

The Administration single-employer pension reform proposal would make defined-benefit plans a more viable option for employers and workers by achieving:

• Sounder long-term pension funding

• Reduced risk to workers and to the pension insurance system

• Increased transparency and simplified measurements

• Improved incentives for sound pension funding and greater flexibility for employers to fund up in good times

• Opportunities for sponsors to reduce volatility in required pension contributions

• Premiums that meet PBGC’s long term funding needs

• Reduced risk to the taxpayers of having to bail out the PBGC

• EBSA Offices

• Organization Chart

• Final Rules

• Notices

• Proposed Rules

• Public Comments

• Advisory Opinions

• Exemptions

• Field Bulletins

• Information Letters

• Interpretive Bulletins

• EO 12866 Guidance

• Abandoned Plans

• Correction Programs

• Fiduciary Education

• For Health Plans

• For Retirement Plans

• For Small Employers

• Reporting and Filing

• Webcasts

Consumer Information

• Health Plans

• Retirement Plans

• Retirement Savings

• Questions/Assistance