Congress has started public discussions about the administrationís pension reform
proposal. The Senate Finance Committee, House Education and the Workforce
Committee, and House Ways and Means Select Revenue Measures Subcommittee
held hearings in March. In addition, the Senate Health, Education, Labor and Pensions
(HELP) and Finance Committees conducted a joint forum to discuss the future of the
private pension system.
The hearings are an important step in the pension reform debate. Although Congress
held pension reform hearings during the 2003-2004 legislative term, the administrationís
proposal focuses the debate on specific reforms in addition to broader issues.
During the hearings, administration officials testified about the need for fundamental reform.
They claimed that the administrationís proposal would improve accuracy and stabilize the
Pension Benefit Guaranty Corporation (PBGC) while offering flexibility to plan sponsors.
But witnesses representing plan sponsors and participants voiced their concern that the
proposed reforms would discourage plan sponsorship. Lawmakers affirmed their interest
in pension reform, but it is not clear which legislative proposals ó if any ó will make it
all the way to enactment this year.
One complicating factor is that the budget resolution for the 2006 fiscal year directs Congress
to raise PBGC premiums as part of the budget reconciliation package. Separating provisions
to raise PBGC premiums from the rest of the pension reform proposal could get in the way
of Congress acting on other pension reform provisions this year.
The Administration States Its Case
A panel of administration officials opened the March 1 hearing at the Finance Committee, the
March 2 hearing at the Education and the Workforce Committee, and the March 9 hearing
at the Ways and Means Select Revenue Measures Subcommittee. PBGC Executive Director
Bradley Belt summarized the PBGCís financial condition and told lawmakers that the current
funding rules have led to systemic underfunding and ďmoral hazard.Ē Assistant Treasury
Secretary Mark Warshawsky outlined the administrationís proposed funding rules. Echoing
Mr. Belt, he told the committee that weaknesses in todayís defined benefit system result from
failings in the current funding rules and regulatory structure. Assistant Labor Secretary Ann
Combs agreed with Mr. Beltís and Mr. Warshawskyís assessments. She also summarized the
benefit limitations, disclosure requirements and PBGC premium provisions in the administrationís
In addition to administration officials, committee members heard from plan sponsors, participant
groups, labor organizations and academic experts. Larry Zimpleman of the Principal
Financial Group testified before the Finance Committee on behalf of the Business Roundtable.
He expressed the business communityís support for enhanced disclosure and a higher
deductible contribution limit. But he also voiced his concern that increased volatility and
steeper PBGC premiums would ultimately do more harm than good. He maintained that a healthy, vibrant defined benefit system is the key to a sound financial future for the
PBGC. Several business groups, including the American Benefits Council, ERISA Industry
Committee, Financial Executive Institute, National Association of Manufacturers and
U.S. Chamber of Commerce, supported Mr. Zimplemanís testimony. Business community
witnesses also echoed those sentiments at the Education and the Workforce Committee
and Ways and Means Select Revenue Measures Subcommittee hearings. And witnesses
from labor and participant groups expressed many of the same or similar concerns.
Yield Curve, Disclosure Key Discussion Topics
While lawmakers at the hearings asked about several of the provisions in the administrationís
proposal, many of the questions focused on the yield curve, benefit limitations and expanded
Some lawmakers were concerned about how the yield curve would affect volatility and plan
sponsorsí investment strategy. At the Ways and Means Select Revenue Measures Subcommittee,
chair David Camp (R-Michigan) asked why the yield curve would be more accurate than
the corporate bond rate and whether the yield curve has been tested. Mr. Warshawsky
responded that the administration believes the yield curve would be more accurate and
that it is widely used elsewhere, such as in calculating mortgage rates.
But other witnesses stated that the spot-rate yield curve proposed by the administration
would increase volatility, making it difficult for sponsors to project their pension contributions
and discouraging continued plan sponsorship. In addition, Finance Committee ranking
member Max Baucus (D-Montana) asked how the administrationís proposal would affect
the investment of plan assets. Mr. Warshawsky replied that the proposal does not tell plan
sponsors how to invest plan assets.
Many lawmakers and witnesses expressed support for the proposed disclosure requirements.
Education and the Workforce ranking member George Miller (D-California) applauded
enhanced disclosure. Ron Gebhardtsbauer of the American Academy of Actuaries said that
the academy would support even stronger disclosure requirements than those the administration
is proposing. Finance Committee member Jeff Bingaman (D-New Mexico) expressed
his support for the proposalís benefit limitations and said he would support additional limitations
on benefits for corporate executives.
Participants also discussed the elimination of credit balances. Education and the Workforce
Committee chair John Boehner (R-Ohio) and Representative John Kline (R-Minnesota)
asked about the consequences of eliminating credit balances. The business community
witnesses were vocal in their strong support for retaining credit balances, explaining that
they could minimize volatility and encourage advance funding of pension liabilities.
Senate Committees Hold Joint Discussion Forum
On March 15, the Senate HELP and Finance Committees held a joint forum that focused on
the long-term outlook for employer-provided retirement benefits. Although the forum did not
specifically address the administrationís funding reform proposal, it focused on the importance
of preserving the defined benefit system and encouraging savings. Many participants
called for funding rules that would foster stability and predictability, increase flexibility so that plan sponsors could respond to changing demographics and business environments,
and clarify the legal status of hybrid pension plans.
Forum participants included large and small plan sponsors, service providers, mutual fund
companies, think tanks, and groups representing seniors and plan participants. In his
opening and closing statements, HELP Committee chair Mike Enzi (R-Wyoming) expressed
support for the defined benefit system.
Much of the discussion addressed defined benefit plans. Senator Orrin Hatch (R-Utah), a
member of both the Finance and HELP Committees, questioned the sustainability of defined
benefit plans. Forum participants expressed enthusiastic support for defined benefit plans,
noting that these plans minimize investment risks to employees, which has become particularly
important given the higher risks workers face in health care coverage and costs. Others
noted that defined benefit plans are an efficient means of delivering compensation to
employees, and emphasized the need to promote the benefits and security of defined benefit
plans to employees. Forum participants also noted that plan sponsorship will continue its
current decline if pension reform increases volatility or the overall cost of plan sponsorship.
The low U.S. savings rate was another key discussion topic. Forum participants questioned
whether American workers are saving enough, especially given the steep increases in health
care costs future retirees are likely to face. Several participants asked Congress to provide
fiduciary clarification for lifecycle investments under automatic enrollment arrangements.
Participants asked Congress to expand the SAVER credit to encourage more savings; one
participant asked Congress to consider increasing available tax credits ó especially for
low-income workers ó to encourage Americans to save more. Forum participants also
emphasized the need to educate American workers about saving and retirement, and asked
Congress to provide legal clarification and financial incentives to encourage employers to
provide a financial education to their employees.
Budget Resolution Complicates Process
The House and Senate have approved separate budget resolutions, and both resolutions
could affect PBGC premiums and the pension reform debate.
Budget resolutions guide the budget reconciliation process by determining how much
revenue congressional committees must raise from the federal programs they control, and
how much lawmakers may spend on tax cuts and other items. The House and Senate
budget resolutions would instruct the Education and the Workforce, HELP and Finance
Committees to set aside substantial revenues. For the Education and the Workforce and HELP
Committees, the PBGC is a major source of such revenue. So, PBGC premium increases will
be under discussion as part of the budget reconciliation process.
In addition to increasing the cost of plan sponsorship, including PBGC premiums in the
budget resolution would have important implications for the content, process and timing
of pension reform. If PBGC premium provisions were removed from the broader funding
reform debate, revenue raised by a premium increase may not be available to offset the cost
of other pension reform provisions, such as increasing the deductible contribution limit.
Budget reconciliation deadlines could accelerate the legislation, moving reform provisions through the legislative process before they have been fully discussed and vetted.
Furthermore, strict and complicated procedural rules for the Senateís reconciliation package
could make it difficult to add funding rules and other pension reform provisions to the
The debate is still in the early stages. Lawmakers will continue reviewing the administrationís
funding reform proposal, and additional legislative action is expected during the next several
months. Senator Chuck Grassley (R-Iowa) and Senator Baucus have reintroduced the
National Employee Savings Trust and Equity Guarantee Act (NESTEG), which they hope
to move through the Finance Committee. Education and the Workforce Committee chair
Boehner is working with Employer-Employee Relations Subcommittee chair Sam Johnson
(R-Texas) and Ways and Means chair Bill Thomas (R-California) to draft a pension reform
bill. But, the debate over the budget resolution could have important consequences for
lawmakers hoping to act on pension reform this year ó and for pension plan sponsors.