HOUSE, SENATE PANELS FOCUS ON OVERHAULING PENSION PLAN RULES.

Congress focused last week on overhauling pension plan rules. The House Committee on Education and the Workforce opened hearings on a permanent, long-term solution to the current pension underfunding crisis; the Senate Health, Education, Labor and Pensions Committee marked up a pension plan bill that would allow businesses not to use the 30-year Treasury bond rate in determining its pension fund liabilities, and the Senate Finance Committee considered how to tax corporate-owned life insurance benefits.

Senate Finance Committee Chairman Charles E. Grassley (R-IA) told Liability & Insurance Week he hadn't decided yet on the final bill's language about taxing COLI benefits.

By a unanimous voice vote Sept. 17, the committee approved an amendment by Sen. Jeff Bingaman (D-NM) to tax the COLI benefits employers receive from the deaths of employees who had not been with the company for over one year prior to their deaths. The tax was to be effective immediately.

After the vote, the life insurance industry went into a tailspin and Sen. Kent Conrad (D-ND) proposed delaying the effective date of the new tax to the date the overall pension fund bill is enacted and banning a company from purchasing COLI for employees earning less than $90,000 a year.

Frank Keating, president and CEO of the American Council of Life Insurers, told the Senate Finance Committee at a hearing Oct. 23 that his organization supported the Conrad proposal.

But Grassley's ire was raised at the hearing when the General Accounting Office reported it found no comprehensive COLI data available even though life insurance lobbyists had told the committee COLI was 25 percent of the industry's business.

"How is it that companies don't have information about a quarter of their business?" Grassley asked.

"If the industry is telling us that we are legislating in an area where legislation is not needed, then we need to know why. If we've got questions, you need to give us answers, and that includes data."

Grassley indicated he was feeling out what option would be acceptable to committee members: the Bingaman approach, the Conrad approach or some other alternative.

A COLI provision was not included in the bill that passed the Senate HELP Committee but Gregg and Grassley now are reviewing the language in the bills passed by both committees and hope to get the final legislation to the floor before Thanksgiving.

Congress must act before Jan. 1 because that is when the current rate used to estimate pension fund liabilities expires. If it does not do so, the amount corporations must contribute starting Jan. 1, 2004, will increase by billions of dollars.

The HELP bill, which has not been given a number, is similar to H.R. 3108, which passed the House Oct. 8 by a vote of 397 to 2.

These two bills give Congress two years to come up with a long-term rate formula for determining pension fund liabilities.

In the interim, the bills would require corporations to use a formula linked to long-term corporate bond index rates to estimate their liabilities.

The index rate would be determined by the secretary of labor in consultation with the secretary of the Treasury.

The HELP bill also would establish a 13-member commission on defined pension benefit plans to determine how to reform defined benefit pension plan funding rules.

House Education and the Workforce Committee Chairman John Boehler (R-OH) promised after the overwhelming House vote he would "proceed immediately with efforts to provide a permanent replacement for the 30-year Treasury rate benchmark," and he lost no time in scheduling the first hearing.

In response to a request from Boehler, Barbara Bovbjerg, director of education, workforce and income security issues for the General Accounting Office, released a study, Private Pensions: Changing Funding Rules and Enhancing Incentives Can Improve Plan Funding, which discusses two general approaches to reforming how defined-benefit plans are funded.

She said the first approach would change the funding requirements directly with reforms for calculating plan liabilities, credit balances, unfunded benefits or benefit increases, and lump-sum distributions.

She said the second approach would improve plan funding indirectly by providing better incentives for sponsors to keep their plans better funded.

Robert D. Krinsky, chairman of the Segal Co., a benefits, compensation and human resources consulting firm, told the House committee on behalf of the American Benefits Council: "First, do no harm."

Beginning in 1986, he said, "Congress enacted short-sighted revenue-driven restrictions that lowered the maximum tax-deductible contribution that employers could make to pension plans, imposed a significant excise tax on employer contributions that were not tax-deductible and placed potentially confiscatory penalties on withdrawals of surplus assets after plan termination."

He said these changes discouraged employers from contributing to their pension plans and encouraged them "to keep their plans as near as possible to the minimum funding level instead of providing a healthy financial cushion above that level."

But "a wholesale reworking of the defined benefit funding rules" is not needed, adding, "Nor should anyone make the mistake of assuming that the underfunding caused by the recent business cycle and an anomalous asset and interest rate environment indicate a need fore a hasty overhaul of the funding rules," he cautioned.

"The nonsensical use of the obsolete 30-year Treasury rate, coupled with recent market, interest rate and economic conditions - a veritable 'perfect storm' of adverse pension funding circumstances - should be expected to produce temporary funding deficiencies that will correct as conditions improve and once Congress replaces the 30-year rate," he said.

He strongly endorsed three proposed pension funding rule changes:

* Increasing the limit on deductions for contributions to a defined benefit plan so the maximum amount deductible is not less than 130 percent of the plan's unfunded current liability.

* Allowing employers to value liabilities as of the first day of the plan year, while valuing assets as to the last day of the plan year.

* Revising the current rules that restrict the deductibility of contributions by employers that sponsor both defined benefit and defined contribution plans to the greater of defined benefit minimum funding requirements or 25 percent of pay.

David John of the Heritage Foundation praised the Treasury Department's July 8 proposal to measure pension plan funding over H.R. 1776 which passed the House Ways and Means Committee and recommended Congress consider incorporating the Treasury Department approach into the final bill.

He cautioned, however, "simply looking at the discount rate for current liabilities may not be enough...it may be even more important to look at the termination liability of chronically underfunded pension plans."

Although the Pension Benefit Guaranty Corporation has "an important mission," he said, "its presence increases the risk that taxpayers will end up paying for the protection it offers.

"Until PBGC is either reformed to include a premium rate that includes a more effective measure of risk or changed into an agency that helps to arrange properly priced private sector insurance, debates about pension funding status are going to reoccur on a regular basis."

Michael Gordon, general counsel of the National Retiree Legislative Network, said it opposed temporarily changing the discount rate from the current modified 30-year Treasury bond rate to a composite corporate bond rate.

He said those in Congress who believe that granting a temporary two-year corporate bond discount favor to defined benefit plan sponsors will create pressure for the needed comprehensive reform of the pension system "have got it backwards."

The two-year reprieve, he said, will only "create pressure for more and more quick fixes while a genuine comprehensive and principled solution becomes ever more elusive."

J. Mark Iwry of The Brookings Institution pointed out PBGC ran a deficit for the first 21 years of its history and only achieved a surplus from 1996 through 2001.

"When the pension insurance system was enacted as part of ERISA in 1974," he said, "plan liabilities typically were not large relative to plan sponsors' market capitalizations.

"However, during the ensuing 29 years, pension and retiree health obligations have grown relative to assets, liabilities and market capitalization of the sponsoring employers (and some financially troubled companies now have underfunding in excess of their market capitalization).

"Moreover, contrary to what might have been the prevalent expectations in 1974, these economic troubles and associated underfunding have come to affect not only individual companies but entire industries."

He continued: These developments have been saddling plan sponsors with funding obligations that are large and - in the case of the unusually low interest rates and low equity values - unexpectedly sudden. ..The prospect that more defined benefit plans will be 'frozen' or terminated is a very real concern."

He recommended Congress "proceed with caution, after thorough analysis, to adjust the funding and related rules in a way that carefully balances the competing considerations."