# Presentation: 087720

## Administration Single-Employer Pension Reform Proposal

## Challenges Facing the Defined-Benefit Pension System

- The pension insurance system is broken and threatening workers, healthy plan sponsors, and taxpayers
- There are three keys to fixing the system:
**Reform funding rules** – to induce employers to fully fund their plans
**Reform insurance premiums** -- to better reflect costs and risks
**Improve disclosure** -- to better inform workers, investors and regulators

**Our Goals**

- Protect workers
- Avoid a taxpayer bailout of PBGC

## Problem: Underfunding has skyrocketed...

**Total Underfunding of Insured Single-Employer Plans**

**Billions**

- Projection

## ...and PBGC has fallen into a deep hole

**PBGC Net Position Single-Employer Program**

## Summary: The Administration Single-Employer Pension Reform Proposal

| One single, accurate measure of liabilities valued according to current duration-matched yield curve of corporate bond rates |
| --- |
| Assumptions that appropriately reflect the plan’s risk of termination |
| Plans given a reasonable period of time to reach their funding targets |
| Sponsors allowed to make additional deductible contributions during good economic times |
| Underfunded plans or financially weak sponsors restricted from increasing unfunded benefits |
| Premiums that meet PBGC’s long-term funding needs |
| Better disclosure of plan information to workers, markets, and regulators |
| Clarify the treatment of hybrid (cash-balance) plans to expand pension options |
| Improve PBGC’s standing to enforce contributions on firms in bankruptcy |

## The Administration proposal would simplify the system by replacing multiple measures of pension liabilities with one basic concept

- 	_**Current Practice**_**	****	****          **_**Administration Proposal**_

**Assumptions modified as needed to reflect the risk of      termination posed by the plan**

**Actuarial Liability**

**Current Liability**

**Single Conceptual Measure of Liabilities Based on Benefits Earned to Date**

- RPA Current Liability

- OBRA Current Liability

- Gateway Liability

## Under the Administration proposal, a plan's funding target would be based on the plan’s Ongoing or At-Risk liability, depending on the sponsor’s financial health 

- Investment Grade (Baa or better)
- Junk bond credit status less than 5 years
- Junk bond credit status 5 years or more

- Target assumes it is an _Ongoing_ plan
- Target in between _Ongoing _and _At-Risk _status
- Target assumes it is an _At-Risk_ plan

_**Funding Target**_

_**Company Status**_

- Empirical evidence shows that a firm’s time spent in junk bond status is a strong indicator of the likelihood of plan termination

- In an _Ongoing_ plan, employees are assumed to retire and to choose lump sums as they have in the past.  In an _At-Risk_ plan, the rules will assume that employees will take lump sums and retire as soon as they can

## Under the Administration proposal, plans would annually contribute enough to address their funding shortfall over a reasonable period of time

**The Administration proposal gives plans a reasonable period of time to address underfunding**

## The Administration proposal would allow plan sponsors to make additional deductible contributions during good economic times

| Minimum Required Contribution | Maximum Deductible Contribution |
| --- | --- |
| - Pursuant to funding target (not including future salary increases) | - May pre-fund projected salary increases
- May fund to include a “volatility cushion” equal to 30% of their funding target |

## The Administration proposal requires employers to pay for additional benefits immediately if the sponsor is financially weak or has a significantly underfunded pension plan

| Percentage Points Below Required Funding Level (Target) | Bankrupt Sponsor | Junk Grade Sponsor
(At-Risk Liability Target) | Investment Grade Sponsor
(Ongoing Liability Target) |
| --- | --- | --- | --- |
| 0 to 19 |  No benefit increases
 No lump sums
 No accruals |  No new restrictions |  No new restrictions |
| 20 to 39 |  No benefit increases
 No lump sums
 No accruals |  No benefit increases
 No lump sums |  No benefit increases
 |
| 40 or worse |  No benefit increases
 No lump sums
 No accruals | No benefit increases
No lump sums
No accruals 
No preferential funding of executive compensation  |  No benefit increases
 No lump sums |

## The Administration proposal would reform the PBGC premium structure

**Flat rate premiums** will be adjusted (initially to $30) to reflect the growth in worker wages since 1991, when the current $19 figure was set.  Going forward, the flat rate premium will be indexed for wage growth
**Risk based premiums** will be charged to each plan based on underfunding relative to its funding target. The risk-based premium rate will be adjusted periodically by the PBGC’s Board so that premium revenue is sufficient to cover expected losses and improve PBGC’s financial condition

## The Administration proposal would improvethe content and timeliness of disclosure

- Make certain financial information filed with PBGC by underfunded plans publicly available

- Require plans to disclose funding status relative to funding target annually
- Require funding trend data in participant disclosure

- Accelerate filing deadline for certain plan funding reports
- Accelerate disclosure of information to workers

**Better Content**

**Greater Transparency**

**More Timely Information**

## Administration proposal would protect plans in bankruptcy

- Allow PBGC to perfect its lien against missed contributions while plan sponsor is in bankruptcy
- Notify participants when plan sponsor files for bankruptcy, including effect on plans

## What is the Administration doing to help employers and workers expand retirement choices?

- Hybrid plans (e.g., “cash balance” plans) combine the best of defined benefit and defined contribution
- Plans are portable
- Employees understand and appreciate benefits
- Investment risk borne by employer
- Insured by the PBGC
- Enact the Treasury proposal to a create legal and regulatory environment that supports continuation and adoption of hybrid plans
- Establish Employer Retirement Savings Accounts (ERSAs) that will simplify the rules surrounding employer-provided portable savings plans
- Increase worker access to investment education
- Allow workers in defined contribution plans to diversify out of company stock after three years

## Summary:

**The Administration single-employer pension reform proposal would make defined-benefit plans a more viable option for employers and workers by achieving:**
- Sounder long-term pension funding
- Reduced risk to workers and to the pension insurance system
- Increased transparency and simplified measurements
- Improved incentives for sound pension funding and greater flexibility for employers to fund up in good times
- Opportunities for sponsors to reduce volatility in required pension contributions
- Premiums that meet PBGC’s long term funding needs
- Reduced risk to the taxpayers of having to bail out the PBGC