DB PLANS CURRENT ISSUES

1
DB PLANS CURRENT ISSUES

• A Presentation by
• The ERISA Industry Committee
• May 2005
• Questions? Contact
• Janice Gregory, Senior Vice President
• Jgregory_at_eric.org [phone]

2
DB Plans Bridging the Gaps

• Required Funding
• Permitted Funding
• Lump Sums
• Hybrid Plans
• PBGC

3
DB Required Funding
Fully Funded to
Annually fund normal Termination
Liability
cost interest on past Every Day
service
(pre-ERISA)
Since Studebaker, all funding debates have tried
to pick the right point on this continuum
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So, Whats the Right Point?

• Its the point at which the money is there when
  the employees benefits are due.
• But.
• Benefits are paid out over a LONG time (even lump
  sums)
• And.
• Required funding must fit with employers ability
  to pay (or employer might freeze/terminate plan
  or never set one up)

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The Right Point Must Balance

• Adequate funding against draining the employers
  cash (esp. in downturns)
• Also short term revenue loss if too much is
  required faster than needed
• Keeping up with the times against making cash
  calls predictable and stable
• Long term rules are most predictable and stable
  short term are volatile

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Right Points So Far

• 1974 ERISA
• Long term look, plan assumptions within reason
• Added requirement to pay off past service
  liabilities over time
• 1987 Deficit Reduction Contributions (DRC)
• Short term backstop added, mandates assumptions
  within corridors
• Speeds up contributions, but only after a
  downturn is over and only for plans consistently
  or persistently underfunded

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So Far, cont.

• 1994 DRC Redux
• Corridors narrowed, more plans affected
• In recent years, some plans frozen when faced
  w/DRC
• 2004 Required Interest Rate
• Ditched defunct 30-year T bond in favor of
  corporate rate
• Expires 12-31-2005

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Adms Right Points

• Abolish long term
• Shorten short term (no averaging or smoothing)
• Extra requirements for companies below investment
  grade

• Concerns raised
• No predictabilty
• Increased volatility
• Plan more expensive
• Must overfund
• Assumes reduced equity exposure
• Using credit rating is faulty logic

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Permitted Funding

• ERISA capped through 415 limits
• 1980s deficit reduction reduced 415 limits and
  imposed compensation limit
• Both affect funding
• EGTRRA partially restored permitted funding
• 25 of comp other limits also a problem
• All agree higher limits are needed
• But we have a big deficit

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Lump Sums

• Still tied to 30-year T-bond (very low rate)
• Bad for adequate funding
• May encourage employee to choose LS over annuity
• Rumor mill makes it difficult to change

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Hybrid Plans

• Are hybrid plans age discriminatory?
• One (district) court says yes
• Others say no
• Adm. says no
• How do you compute the lump sum?
• Mismatch between LS and amount shown in account
• Called whipsaw
• Most want to fix

• What happens when a traditional plans is
  converted to a hybrid?
• Some say 411(d)(6) is enough (anti-cutback rule)
• Others say there is a right of expectation
• Adm. Says 5-year maintenance of old benefit
• Its now up to Congress
• Future of DB plans at stake

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Pension Benefit Guaranty Corporation (PBGC)

• Why is it there?
• To pay benefits when plan/employer cannot
• Company must be bankrupt
• 3B paid in 2004 (compare to 120 B for DB
  system)
• To promote pension plans
• To keep premiums at lowest level
• (ERISA sec. 4002)

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Who Pays for PBGC Benefits?

• DB plan sponsors through mandatory premiums
• Totaled 1.5 B in 2004
• Assets earnings on assets held by the PBGC
• Assets of plans trusteed by the PBGC
• Assets were 39B in 2004 (excludes 14 B
  probables)
• Earnings have averaged 11.8 (1985-2004)
• 3.2 B 2004 earnings

• NOT THE TAXPAYER
• Only if mandatory premiums and all remaining
  assets were insufficient to pay might the issue
  come to Congress

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So, Is There a Problem?

• The 23 billion deficit
• Includes 17 billion in projected terminations
• Does not indicate inability to pay any time soon
• Administration proposes premium increase large
  enough to retire projected deficit in under 10
  years.
• Employers concerned