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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
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Reform insurance premiums -- to
better reflect costs and risks
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Improve disclosure -- to better
inform workers, investors and regulators
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…and PBGC has fallen into a deep hole |
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One single, accurate measure of
liabilities valued according to current duration-matched yield curve
of corporate bond rates
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Assumptions that appropriately
reflect the plan’s risk of termination
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Plans given a reasonable period of
time to reach their funding targets
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Sponsors allowed to make additional
deductible contributions during good economic times
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Underfunded plans or financially
weak sponsors restricted from increasing unfunded benefits
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Premiums that meet PBGC’s
long-term funding needs
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Better disclosure of plan
information to workers, markets, and regulators
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Clarify the treatment of hybrid
(cash-balance) plans to expand pension options
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Improve PBGC’s standing to enforce
contributions on firms in bankruptcy
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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. |
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Under the
Administration proposal, plans would annually contribute enough to address
their funding shortfall over a reasonable period of time.
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Minimum
Required Contribution
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Maximum
Deductible Contribution
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Percentage Points Below
Required Funding Level (Target) |
Bankrupt
Sponsor |
Junk Grade Sponsor
(At-Risk Liability Target) |
Investment Grade
Sponsor (Ongoing Liability Target) |
0 to 19 |
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No benefit increases
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No lump sums
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No accruals
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20 to 39 |
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No benefit increases
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No lump sums
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No accruals
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No benefit increases
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No lump sums
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40 or worse |
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No benefit increases
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No lump sums
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No accruals
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No benefit increases
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No lump sums
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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
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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
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Allow PBGC to perfect its lien against missed
contributions while plan sponsor is in bankruptcy
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Notify participants when plan sponsor files for
bankruptcy, including effect on plans
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Hybrid plans (e.g., “cash balance” plans) combine the best of defined
benefit and defined contribution
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Enact the Treasury proposal to a create legal and regulatory environment
that supports continuation and adoption of hybrid plans
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Establish Employer Retirement Savings Accounts
(ERSAs) that will simplify
the rules surrounding employer-provided portable savings plans
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Increase worker access to investment education
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Allow workers in defined contribution plans to diversify out of company
stock after three years
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The Administration single-employer pension reform proposal would
make defined-benefit plans a more viable option for employers and workers by achieving: |
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Sounder long-term pension funding
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Reduced risk to workers and to the pension insurance system
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Increased transparency and simplified measurements
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Improved incentives for sound pension funding and greater flexibility
for employers to fund up in good times
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Opportunities for sponsors to reduce volatility in required pension
contributions
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Premiums that meet PBGC’s long term funding needs
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Reduced risk to the taxpayers of having to bail out the PBGC
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