New Law Changes Pension Funding Rules
The Business Press
Provisional changes to U.S. pension plans were signed Aug. 18 by President Bush to bolster corporate pension funding – a move that will change how companies structure retirement planes for their employees.
The new law, called the Pension Protection Act of 2006, addresses holes in many defined-benefits pension plans that suffer from under-funding. About 34 million people are enrolled in traditional pension programs, also known as defined-benefit plans, according to the U.S. Department of Labor. Defined-benefit plans provide retirees a consistent fixed payout.
The Pension Protection Act of 2006 requires companies to fully fund pension liabilities within seven years. The bill is an update to the Employee Retirement Income Security Act signed into law in 1974.
The recently signed bill has minimal benefits for employers because they are forced to drum up funds to support their defined-benefits plans or convert to defined-contributions plans, which rely on employee participation, said Kirk Stitt, a partner of Soren McAdam Christenson LLP in Redlands. Stitt specializes in pension plans, he said.
“I kind of call it the death knell for defined-benefit plans because the plans are tightened up to require more funding," Stitt said. Soren McAdam currently has more than 75 clients it must prepare for the pension plan changes, Stitt said.
Employers may notice more of an adversarial relationship with their actuaries since the actuaries are required to report a pension plan that is severely under funded, Stitt said.
“If a plan is under-funded by a certain amount, the actuary has to inform the Department of Labor. From that perspective, actuaries are policeman rather than professionals working for a client,” Stitt said. “The act has some benefits and protections for employees and a lot of this is in response to Enron,” Stitt said.
The Pension Protection Act was passed in response to cutbacks in pension funding by companies and fewer Americans initiating savings. The bill encourages the younger work force to join a retirement plan, such as 401k plans, by allowing automatic enrollment of new employees.
Risks I defined-benefits plans in corporations exceed the assets available within those plans, according to the Pension Benefit Guaranty Corp., which oversees retirement plans. The new law requires pensions be fully funded by 2015.
The Pension Preservation Network in Temecula organized a grassroots campaign to lobby against the Pension Protection Act when it was introduced in 2004, said founder Jim Hoskings.
The Network, founded in August 2004, is a watchdog organization of about 4,000 retirees.
Hoskings believes the Pension Preservation Act is a “bad idea” that has no long-term benefits for retirees, he said.
“The Pension Benefit Guaranty Corp. guarantees pensions if they default. It is already $23 billion in debt. They are looking at all these terminations [of pension plans] happening and can take on over $100 billion in defaults. This bill turns its back to that and didn’t address this issue at all,” Hoskings said.
Employers will have to keep a close eye on the Pension Protection Act, particularly on how direct-benefits plans should be funded, said Joe Henehan, chief executive officer of the Henehan Co. in San Bernardino. Henehan specializes in retirement and health benefits planning.
“These changes are so new that employers are not up-to-date yet. There are many changes that will be phased in,” Henehan said.
“It is more important than ever for [employers] to understand how their plans work and understand changes in the funding requirements,” Henehan said.
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