Firms Gauging Impact of Pension Reform Law

By Schoeff, Mark, Jr. | Workforce Management, August 28, 2006 | Go to article overview

Firms Gauging Impact of Pension Reform Law


Schoeff, Mark, Jr., Workforce Management


As plan sponsors dive into the 1,099-page measure, questions about funding requirements and cash-balance plans remain

IT MAY TAKE as much time for companies to sort out the meaning of pension reform legislation as it did to get the bill approved.

After working for more than a year to draft legislation, spending four months in an opaque conference committee reconciling the House and Senate versions, and achieving approval of final legislation in a rush before its August recess, Congress delivered a 1,099-page measure that rewrites U.S. pension laws.

Now corporations have to wade through the hill's provisions, which contain interrelated policy on defined-benefit and defined-contribution pensions, relief for airlines and other industries, and assorted tax reform measures.

The provisions start on a staggered schedule, with new contribution calculations taking effect in January 2008. Over the next few months, the Internal Revenue Service must write regulations and Congress likely will pass a "technical corrections" bill.

"The funding rules are complicated," says Martha Priddy Patterson, a director of Deloitte Consulting in Washington, D.C. "It's going to take people a long time to figure out exactly the impact on their plans."

For instance, companies will be prohibited from using credit balances it their pension is less than 80 percent funded. If it's more than 80 percent, some balances can be utilized.

But the balances, which are built up by overpaying in flush years, must be subtracted from assets to determine whether a plan is "at risk." If it is less than 80 percent funded and sinks to less than 70 percent after worst-case assumptions about early retirement, then companies must increase their pension contributions.

In another complex area, the legislation shields future cash-balance plans, or hybrid plans, from age discrimination lawsuits-as long as companies follow rules regarding interest rates, vesting and conversions.

The hill does not protect the existing 1,500 cash-balance plans. But a few days after Congress approved the pension bill, a federal appeals court judge ruled that IBM did not discriminate against older workers by instituting its hybrid plan.

Even if the judgment withstands further appeal, it doesn't ensure retrospective legality. Modifying current cash-balance plans to meet the rules established by the pension bill could introduce conversion obstacles.

"We haw yet to weigh all the advantages and disadvantages of going one way or the other," says John Lowell, senior consultant with CCA Strategies, an actuarial firm. …

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Firms Gauging Impact of Pension Reform Law
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