Still stinging from its failure to overhaul Social Security, the Bush Administration is setting its sights on pension reform for 2006. And while it’s far from certain what Congress will serve up for approval, it’s clear there will be plenty of action.
To date, both the House of Representatives and the Senate have passed pension-reform legislation. Congress insists that an overhaul of the system is one of its top priorities for the 110th session. And the Bush Administration, while reserving comment on the differences in the House’s Pension Protection Act (H.R. 2830) and the Senate’s Pension Security and Transparency Act (S. 1783), has warned legislators not to “kick this problem down the road,” as U.S. Secretary of Labor Elaine L. Chao put it recently.
But cobbling together legislation that will pass the President’s muster will not be easy. Both bills differ significantly from the Administration’s own proposal. And the key sticking points — funding phase-in, asset smoothing, and the use of credit balances — are far from unstuck.
“The Senate bill excessively delays full funding of pensions to a very long rules phase-in for the funding targets,” says a Department of Labor spokesperson. Moreover, “both bills allow underfunded plans to avoid making their required annual contributions by counting their past contributions as pension credits.” Under current rules, companies can make such voluntary prepayments as credit balances, offsetting their future funding requirements, a tactic the Administration’s original proposal disallowed.
Smoothing is another rough spot. At present, firms are permitted to smooth fluctuations in the market value of plan assets by averaging this value over a five-year period within an allowable range of 80 to 120 percent of the assets’ fair-market value. Bush’s proposal would end this practice. But while both bills reduce smoothing, they do so by different amounts. The House bill, for example, restricts smoothed-asset valuations to no less than 90 percent or no more than 100 percent of the assets’ fair-market value. “The devil is in the details,” says James Klein, president of The American Benefits Council, in Washington, D.C.
From his vantage point, however, Mark White, CFO of SAP America, is concerned less with the Bush Administration’s opposition than with the possibility of special interests derailing pension reform. “I don’t think [congressional] actions should be heavily influenced by a few industries with current problems, such as the automotive industry or the airline industry,” White says.
Still, many observers say the political winds may be in favor of pension reform. “I fully expect that Congress will iron out the differences,” says Klein. “With Social Security reform a bust, pension reform is a must.”
