Pension Benefit Deal Looms in Congress

Sen. Harry Reid, D-Nev., and, in the background, Sen. Mitch McConnell, R-Ken. Photo credit: AP Images Sen. Harry Reid, D-Nev., and, in the background, Sen. Mitch McConnell, R-Ken. Photo credit: AP Images

An adjustment to defined benefit funding requirements sought by industry is part of the mix as Congress works on legislation that would both reauthorize highway funding programs and freeze student-loan interest rates.

Under the language currently being proposed, companies would be able to use the 25-year corporate bond average when determining the discount rate used to appropriately fund defined benefit plans, according to Joe Lieber, an analyst at Washington Analysis.

Under current law, companies use the last two-year corporate bond average when determining their discount rate.  Consequently, companies' discount rates will rise, meaning smaller pension contributions and, therefore, higher net income, according to Lieber.

The defined benefit provision is being used to offset the cost of freezing the current student loan rate loan rate at 3.4%. An agreement on the student loan issue was announced late Tuesday by Sen. Harry Reid, D-Nev., and Sen. Mitch McConnell, R-Ken., Senate majority and minority leaders, respectively.

Under current law, the rate would go to 6.8% as of July 1 unless Congress takes action. The provision has bipartisan support and raises $9.5 billion over ten years, which will help defray the cost of the highway or student loan bill. 

The American Benefits Council, which represents companies of all sizes on pension and retirement benefits issues, has been among the trade groups and companies pushing for the funding change because it could positively impact jobs.

Jason Hammersla, a spokesman for the ABC, explained that current artificially low interest rates are forcing companies to increase their contributions to defined benefit plans, money that could be better used for investment or hiring, “because the last 10 years are a combination of historically low interest rates and artificially low interest rates.” 

Another issue is premium increases for the Pension Benefit Guaranty Corporation. That would also be used to offsets the costs of both the student loan fix and funding of the transportation bill, S. 1813.

The pension provision could be used to help fund a 27-month extension of the highway bill, as opposed to the option of a 15-month extension. However, Lieber cautions that because time is rapidly running out, a short-term extension on current legislation may be necessary because Congress leaves soon for its July 4th recess.

One of the concerns of ABC and other private sector interested parties about the PBGC provision is that it hasn’t been analyzed yet by Congress. The Obama administration has proposed to raise premiums payable to the PBGC by $16 billion over 10 years.

This would be achieved partially by increasing the flat-rate premium and partially by giving the PBGC the right to set its own variable rate premiums, as well as to base such premiums on factors that include the financial condition of the employer.

“Adoption of this proposal in whole or in part would substantially accelerate the decline of the defined benefit plan system and adversely affect job retention,” ABC argues in a position paper. “Several myths about PBGC that have been raised during the policy debate are highlighted here.”

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