Risk & Compliance

Age Discrimination Snags Lurking in Pension Rules

New federal pension rules are drawing fire from both sides of the cash-balance plan debate. Plus: Freddie Mac bill introduced; natural-gas shortage...
Kris FrieswickJune 30, 2003

When the Treasury Department and the Internal Revenue Service released proposed regulations last year that would make it easier to convert to cash-balance plans, pension plan sponsors breathed a sigh of relief — until they read the fine print. The new rules, it turns out, could actually make it harder to switch to such plans.

Now the agencies have scrapped one of the problematic regulations, but experts say unintended barriers to cash-balance plans still lurk in the remaining rules.

The proposed rules were intended to clear up ambiguity around age discrimination in pension plans. But critics soon pointed out that the rules would render illegal a number of current pension plan practices — even some that are considered friendly to older workers.

Most of the controversy centered on changes to the so-called comparability rule. The American Benefits Council (ABC), which represents large corporate plan sponsors, pointed out that changes to the rule, intended to prohibit benefits plans from being weighted in favor of highly compensated employees, might also block other, more praiseworthy practices — such as offering “transition credits” to older workers whose benefits would be diminished if an employer switches from a defined-benefit to a cash-balance plan. The rule change could also prohibit grandfathering older employees into an existing pension plan.

The proposed regulations would have prevented these practices because older employees are often more highly compensated than others, thanks to their (usually) longer tenure. “Plans that employed such practices were virtually an automatic fail under the proposed rules,” says Eric Lofgren, director of benefits consulting at Watson Wyatt.

After receiving nearly 5,000 comment letters on the proposed regulations, Treasury announced on April 7 that it was withdrawing the new comparability rule. That’s good news for companies that want to convert to cash-balance plans, but it may not be enough.

Another provision in the proposed regulations, an age-discrimination test for pension plans, would have the side effect of prohibiting long-standing pension practices. “They’ve proposed a quantitative age-discrimination test that’s unworkable,” charges John Scott, director of retirement policy at the ABC. “Perhaps they created more problems than they solved.”

Critics of cash-balance plans aren’t happy with the regulation, either. Eva T. Cantarella, an attorney at Hertz, Schram & Saretsky, in Bloomfield Hills, Mich., says she doesn’t believe the regulations are helpful to the age-discrimination debate. “I don’t think all these proposed regulations are necessary,” she says.

Mortgage Action; Energy Inaction

On Tuesday Rep. Richard Baker, (R-La.) proposed a law that would abolish the Office of Federal Housing Enterprise Oversight (OFHEO), the arm of the Department of Housing and Urban Development that keeps tabs on Freddie Mac and Fannie Mae, the two largest mortgage-lending operations in the nation.

The bill was announced as a response to the accounting and leadership problems at Freddie Mac. This from the Associated Press. According to the bill, a year after the law takes effect, the OFHEO would be replaced by the Treasury Department, the agency that oversees savings and loan companies.

Baker has long contended that the Office of Federal Housing Enterprise Oversight (OFHEO) is too weak, and his argument was validated when Freddie Mac became the subject of investigations by the Department of Justice and Securities and Exchange Commission.

Under Baker’s proposal, the Treasury Department would have greatly expanded regulatory clout. For instance, the regulators would be empowered to define and limit the scope of Freddie Mac and Fannie Mae’s activities, restrict growth of their assets, and put them into receivership — and possible liquidation — if capital was seriously inadequate, reports the news service.

In addition, Treasury officials would wield the power to remove officers, directors and others from the companies, and impose civil fines of up to $2 million a day on the companies, or their executives.

In other regulatory news, there was no action on the part of Congress or the Department of Energy to scale back air-quality laws or order fuel-switching to counter reported natural gas shortages.

At an industry conference last week, Energy Secretary Spencer Abraham told the crowd that there was little the government could do over the next year to increase natural gas supplies. However, he did encourage utilities and other groups to ramp-up conservation efforts to help increase the natural gas stocks for the coming winter.

The meeting was called to discuss possible short-term actions to reveal what officials are calling the most worrisome gas shortage in 25 years, says a report in USA Today. Many manufacturing facilities use natural-gas to operate and heat industrial power plants. But the impact on he economy doesn’t stop with the industrial sector. Higher home-heating rates can stifle consumer spending: as consumers pay more for energy, they will spend less in other parts of the economy.

“It is not just a problem for gas intensive businesses and industries. It is a national concern that will touch virtually every American,” Abraham said at the meeting sponsored by the National Petroleum Council.

Energy Department estimates say natural-gas home heating bills could rise as much as 19 percent over last year, which is a 54 percent increase over the 2001-2002 winter season. If the 2003-2004 winter turns out to be colder than expected, prices would climb even higher.

Record amounts of natural gas have been stockpiled during the last few weeks, however analysts say the supply is still 29 percent below the 2002 mark and 19 percent under the five year average.

Officials from the petrochemical industries are urging the Bush administration to reduce air-quality regulations for utility and industrial plants to make it easier for them to switch from natural-gas to coal or oil during the summer months. Natural-gas is cleaner burning than the other two fossil fuels.

But for now, Abraham rejected the call to make recommendations to the White House, saying that it was up to the Environmental Protection Agency to work-out clean-air rules.