Congress Adopts “Pension Protection Act;” Sponsors Have Much To Consider

Both houses of Congress have approved legislation that will overhaul funding rules for defined benefit pensions in a way that may significantly increase the volatility of their funding requirements. President Bush is expected to sign the legislation soon.

The legislation, known as “Pension Protection Act,” or H.R. 4, also contains provisions that will be beneficial to defined contribution plan sponsors. The law takes effect in 2008.

On the single-employer pension side, H.R. 4 provides for a permanent interest rate based a modified yield curve for employers to measure permanent pension liabilities, and shortens the deadline for under-funded plans to become fully funded to seven years.

Under-funded multiemployer pensions, meanwhile, will be required to establish “quantifiable benchmarks for measuring a plan’s funding improvement,” according to an official summary of the legislation. Amortization of plan liabilities associated with any plan benefit amendments will be shortened to 15 years, from the current 30-year limit. Multi-employer plans will be required to improve their funding status “by one-third within 10 years if a plan is less than 80% funded, or will hit a funding deficiency within seven years,” according to the summary.

Additional multiemployer provisions include:

• New notification requirements for underfunded plans;
• Prohibition of benefit improvements if that would cause the plan to drop below 65% funded status, plus new funding standards for plans below 65% funded status; and
• Raising the maximum deductible limit to 140% of current liability.

Additional provisions relating to single-employer plans include:

• Tightening up, to seven years, the deadline for under-funded plans to become fully funded, as well as accelerated funding requirements for other plans deemed to be “at risk” under a new set of rules;
• A prohibition on the use of credit balances if plans are less than 80% funded;
• Limiting interest rate smoothing to two years instead of the current five-year limit for assets and four years for liabilities, and
• Establishing a $1,250 per-participant PBGC premium for plans terminating plans upon entering bankruptcy.

Additional highlights of the legislation, as summarized by the American Benefits Council, can be read here.