Defined Benefit Pension Reform for Single-Employer Plans

Publication Date: July 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Labor

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Abstract:

There is considerable interest this year in reform of the laws governing funding of single-employer defined benefit pension plans and premium structure for the Pension Benefit Guaranty Corporation (PBGC). Large and growing deficits for the PBGC and continued underfunding of pension plans, particularly for financially weak companies, are the major reasons behind the push for reform.

This report outlines the complex current law governing the funding of singleemployer defined benefit pension plans. It discusses the role of the PBGC in insuring pension benefits, the structure of the premiums that single-employer plans must pay the PBGC, and the benefits guaranteed by the PBGC in exchange for the payment of premiums. The report also describes reporting and disclosure requirements that apply to plans.

The Administration, early in 2005, proposed comprehensive reform of pension funding rules, PBGC premium structure, and reporting and disclosure requirements. Under the proposed approach, the interest rates used for pension funding would be based on a yield curve of corporate bond rates. This report describes the Administration proposal and provides a simple example to illustrate calculation of a liability using a yield curve.

Elements of the Administration proposal form the basis of some of the bills that have been introduced in the 109th Congress. Other bills emphasize features not included in the Administration proposal. Several bills have been introduced in the 109th Congress including H.R. 2830 (the Pension Protection Act of 2005), S. 219, (the National Employee Savings and Trust Equity Guarantee Act of 2005), and H.R. 1960 and H.R. 1961 (each titled the Pension Preservation and Savings Expansion Act of 2005). Other bills include H.R. 2233, S. 991, H.R. 2327, S. 1158, S. 685, H.R. 2106, and S. 861.

This report includes quantitative analysis based on regulatory filings by pension plans for 2001 and 2002 to provide an assessment of the number of plans that might be affected by certain elements of the Administration proposal. It also summarizes the reaction to the Administration proposal by business and labor.

The report also includes an illustration of the effect on a hypothetical plan sponsor's plan contribution and funded ratio of the credit balance approach used in current law versus the Administration proposal.

The PBGC also insures multiemployer pension plans. The laws and issues relating to multiemployer plans are quite different than for single-employer plans. This report focuses on single-employer plans. This report will be updated upon major legislative developments.