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· Chao Releases Administration DB Reform Proposal

January 10, 2005 ( – The Bush Administration on Monday released a long-awaited set of reforms to the defined benefit private-sector pension plan system including stepped up pension insurance funding and simplified plan funding target rules.

The announcement by US Department of Labor (DoL) Secretary Elaine Chao comes as federal government regulators and Congressional lawmakers are grappling with how to fix a system that has seen numerous private DB plans taken over by the pension insurance agency - particularly in the hard-hit steel and aviation sectors.

Chao said rule simplification was a guiding principle for the sweeping reform proposals that now go to Capital Hill where enacting bills are expected to be introduced in both the US House of Representatives and the US Senate. Administration officials, briefing reporters after the speech, said the administration is leaving many of the specifics up the lawmakers.

"Today, for example, the rules that govern how much money an employer must put in a pension plan are complex, confusing and ineffective," Chao admitted in a speech at the National Press Club in Washington, DC. "The maze that has been created by the current funding rules is virtually incomprehensible. When you put it on paper, it looks like an engineering schematic. If we're going to ensure that companies can prudently plan for the workers' retirement, they shouldn't need a rocket scientist."

According to Chao, the administration proposal has three prongs:

Reforming the funding rules for private defined benefit pension plans to ensure that employers fully fund their retirement promises. Officials said this includes:

"a single, accurate way" to guage a fund's liabilities that would include a requirement for financially strapped companies to also actuarially assume that workers will retire as soon as they possibly can and will take benefits in a lump sum.

funding targets that reflect a plan's risk of termination with a "reasonable time" for companies to meet the target of having enough funding to pay for its liabilities. Officials said they had studied the notion of giving plans seven years to reach their targets.

flexibility for solvent companies to make more generous contributions to pension plans during good economic times
restrictions on the ability of weaker firms to promise more benefits for which they can pay. "We will put a stop to financially strapped companies promising generous retirement benefits they cannot afford," Chao said in her speech. "That is one of the major factors responsible for the long-term deficits currently projected in the federal insurance program for defined benefit pension plans."

Reforming the premiums that private defined benefit plans pay to the Pension Benefit Guaranty Corporation (PBGC), to better reflect the real risks to the insurance system and costs, in order to keep the agency - despite its $23 billion deficit - solvent over the long term. The proposal calls for the flat per-participant rate to be raised from the current $19 set in 1991 to $30, which officials said would generate about $1 billion annually. The $30 figure would be indexed for worker wage growth going forward. Troubled plans would have to pay a risk-based premium determined by how far off its funding target the plan is. The PBGC would also get new powers to intervene in a corporate bankruptcy to protect potential pension assets.

Increasing the disclosure of information about private defined benefit pension plans to workers, investors and regulators to ensure greater transparency and accountability. Officials said, for example, that DB plan sponsors would have to reveal a plan's status earlier in the plan year than currently along with funding status in recent years. More information about plan funding currently filed with the PBGC would likewise be made public.

Proposal Draws Kudos

One retirement services industry group applauded the administration for putting its reform ideas on the table.
"The defined benefit system is heading for the cliff's edge," said American Benefits Council President James Klein in a statement. "We look forward to working with the Administration and with Congress to rapidly enact pension reform that can arrest the disturbing trends of recent years."

One influential lawmaker also patted Chao on the back for the administration's reform efforts. "It's clear that today's outdated pension laws have failed to protect the interests of workers, retirees, and taxpayers, and it's essential that Congress take action in the coming months to reform and strengthen the defined benefit pension system on behalf of workers and employers," said Representative John Boehner (R-Ohio), chairman of the House Education & the Workforce Committee, in a statement "We plan to review the Administration's proposal very carefully as we move ahead with the process of putting together a comprehensive legislative package for Congress to consider."

In addition to activity in the House led by Boehner, Chao said House Ways and Means Committee Representative Bill Thomas (R-California) will also be involved in considering the administration proposal as will Senator Charles Grassley (R-Iowa ) in the Senate.

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