Tuesday, January 18, 2005

Private Pension Reform

Secretary of Labor Elaine Chao released an overview of the Presidents new pension reform proposal on January 10th. The proposal is designed to: reform funding rules, incent plan providers to adequately fund plans, improve pension funding status disclosure to participants, investors and regulators, raise premiums for risky plans to deter sponsors from inadequately funding their plans and to stabilize the finances of the Pension Benefit Guaranty Corporation (PBGC).

The proposal would require employers sponsoring defined-benefit plans to:
Pay a higher annual insurance premium of $30 per covered employee, which would then be adjusted upward based on an index tied to wages. Today's premium is $19.
Pay additional risk-adjusted premiums if they are operating under bankruptcy protection and have underfunded pension plans. The premium would be determined by the size of the shortfall. Adequately fund their plans based on more accurate measures of the value of their investments and obligations. The new rules would require companies to value investments closer to current market conditions. Long-term obligations would be calculated using a yield curve tied to current corporate bonds.
Disclose more details on a timely basis about the condition of their pension plans and their funding history to workers, investors and regulators.

Absent the details it is difficult to evaluate the proposal but the industry will be closely watching how the legislation develops.


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