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[Senate Report 108-221]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 425
108th Congress                                                   Report

                                 SENATE
 2d Session                                                     108-221

======================================================================

 
                         PENSION STABILITY ACT

                                _______
                                

                January 9, 2004.--Ordered to be printed

 Filed, under authority of the order of the Senate of December 9, 2003

                                _______
                                

    Mr. Gregg, from the Committee on Health, Education, Labor, and 
                   Pensions, submitted the following

                              R E P O R T

                         [To accompany S. 2005]

    The Committee on Health, Education, Labor, and Pensions, 
reported an original bill (S. 2005) to temporarily replace the 
use by pension plans of the 30-year treasury bond rate with a 
composite corporate rate, and to establish a commission on 
defined benefit plans, having considered the same, reports 
favorably thereon without amendment and recommends that the 
bill do pass.

                                CONTENTS

                                                                   Page
  I. Purpose and summary of the legislation...........................1
 II. Background and need for legislation..............................2
III. Legislative history and vote in committee........................2
 IV. Explanation of bill and committee views..........................2
  V. Cost estimate....................................................5
 VI. Application of law to the legislative branch.....................9
VII. Regulatory impact statement......................................9
VIII.Section-by-section analysis......................................9

 IX. Changes in existing law.........................................10

               I. Purpose and Summary of the Legislation

    The purpose of this legislation is to provide a temporary 
replacement for the 30-year Treasury bond for determining 
funding liabilities of private sector pension plans, and to 
establish a blue-ribbon bipartisan commission to make 
recommendations for comprehensive pension reforms. The bill 
ensures that comprehensive reforms to the defined benefit 
system will be enacted by Congress prior to the end of the 3-
year period by requiring Congress to act upon the commission's 
recommendations within 120 days of their receipt.

                II. Background and Need for Legislation

    Current funding and payout calculations for the defined 
benefit plans in the private sector are based on the 30-year 
Treasury bond that is no longer being issued. The low interest 
rate of this bond in recent years means employers must put more 
cash in their plans to satisfy full funding requirements. The 
poor performance of the stock market and recent economic 
downturn compound the problem, resulting in cash-starved 
companies having to divert capital away from development to 
fund their pension obligations.
    The current liability funding rules require the sponsor to 
use a specified mortality table and to calculate liabilities 
using an interest rate that is within a range of rates based 
upon the four-year weighted average of 30-year Treasury bonds. 
As amended in 1994, the permissible range is no lower than 90 
percent of the 30-year bond average and no higher than 105 
percent of the 30-year bond average. In March 2002, Congress 
enacted the Job Creation and Worker Assistance Act of 2002, 
Public Law 107-147, which created temporary funding relief for 
2002 and 2003 only. A plan may use an interest rate of up to 
120 percent of the 30-year bond average. Congress enacted this 
short term higher range in recognition of the fact that, as a 
result of the rise of budget surpluses followed by the decision 
of the Treasury to cease issuing 30-year bonds, the 30-year 
bond rate had dropped to levels that produced inflated 
calculations of pension liability.
    This higher statement of liabilities can require the 
diversion of hundreds of millions of dollars in a single 
company. Overstating liabilities is causing some employers to 
freeze, modify, or abandon their defined benefit plans, thus 
adversely impacting retirement security.
    The relief granted in JCWAA is set to expire at the end of 
2003 and the permissible range will revert to 105 percent of 
the 30-year Treasury bond rate. The low 30-year Treasury bond 
rate of recent years means that this reversion will cause many 
companies to divert cash from capital development, job growth, 
and critical employee benefits like health care insurance, to 
pension contributions, or to freeze or terminate their defined 
benefit plans.

             III. Legislative History and Vote in Committee

    The Pension Stability Act was set before the committee as 
an original bill on October 15, 2003, and considered in 
executive session on October 29, 2003. A substitute, offered by 
Chairman Gregg, was agreed to without objection and the bill 
was approved by voice vote by the committee.

              IV. Explanation of Bill and Committee Views

    The Pension Stability Act provides a responsible, immediate 
solution to the pension funding crisis facing the economy, 
while developing the glide path toward permanent defined 
benefit system funding improvements. It accomplishes these 
goals through three key components.

                            REPLACEMENT RATE

    The bill temporarily replaces the interest rate used for 
plan years beginning after December 31, 2003, and before 
January 1, 2007, in determining current liability for funding 
and deduction purposes and in determining PBGC variable rate 
premiums. For these purposes, the provision replaces the 
interest rate on 30-year Treasury securities with the rate of 
interest on amounts conservatively invested in long-term 
corporate bonds.
    For purposes of determining a plan's current liability for 
the relevant years of this temporary fix, the interest rate 
must be within a permissible range of the weighted average of 
the rates of interest on amounts conservatively invested in 
long-term, corporate bonds during the 4-year period ending on 
the last day before the plan year begins. The rate shall be 
determined by the Secretary of Labor, in consultation with the 
Secretary of the Treasury, through regulations on the basis of 
two or more indices of corporate bonds that are in the top two 
quality levels available reflecting average maturities of 20 
years or more. Such indices shall be publicly available, 
published by established financial services firms, and based on 
publicly disclosedmethodologies. The single interest rate 
prescribed by the Secretary's regulation shall be based on the 
arithmetic average of such indices.
    The permissible range for these years is from 90 percent to 
100 percent. The Secretary of Labor is directed to publish the 
interest rate within the permissible range.
    In determining the amount of unfunded vested benefits for 
PBGC variable rate premium purposes for plan years beginning 
after December 31, 2003, and before January 1, 2007, the 
interest rate used is the annual yield on amounts invested in 
long-term corporate bonds for the month preceding the month in 
which the plan year begins, as determined by the Secretary of 
Labor, in consultation with the Secretary of the Treasury, on 
the basis of two or more indices of corporate bonds that are in 
the top two quality levels available reflecting average 
maturities of 20 years or more, selected periodically by the 
Secretary. The Secretary of Labor is directed to publish such 
annual yield.
    The Secretary of Labor, in consultation with the Secretary 
of the Treasury, is authorized to issue rules to implement the 
use of the rate of interest on amounts invested in conservative 
corporate bonds for purposes of the lookback rules. The 
committee is aware that making calculations of current 
liability for prior years can be difficult in cases where 
administrators have changed or where records are otherwise 
unavailable. Such rules may include simplifying assumptions for 
determining a plan's current liability for years prior to the 
effective date.
    The committee anticipates that IRS Notice 90-11 will remain 
in effect throughout the duration of this legislation. That 
Notice clarifies that any interest rate within the corridor 
prescribed in ERISA and the Internal Revenue Code is deemed to 
be consistent with the assumptions that reflect the purchase 
rates that would be used by insurance companies to satisfy the 
liabilities under a plan upon plan termination.
    By adopting the composite corporate rate for this temporary 
relief, the committee does not close the debate on what 
interest rate benchmark is the most appropriate for the long-
term stability of the defined benefit system.

                                DURATION

    The Pension Stability Act replaces the 30-year Treasury 
bond rate with the composite corporate bond rate based on 
conservative indices for a period of 3 years. This period of 
time is considered critical to ensure the stability of the 
pension system, and is the most appropriate duration for 
setting the stage for permanent and comprehensive reforms.
    In the view of the committee members, a shorter term 
solution, such as the current 2-year fix adopted in 2002, would 
only exacerbate the uncertainty that businesses and unions face 
in planning for the future.
    It is clear to most observers that 2 years will not be 
enough time to consider and enact the comprehensive reforms 
that are needed by the defined benefit system. Already, 
companies are departing from the system at an alarming rate. In 
1983, there were more than 175,000 traditional defined benefit 
pension plans in the United States. This number has declined 
ever since and now stands at fewer than 35,000. Further 
piecemeal reforms will only increase the confusion and continue 
the decline in defined benefit plans. There is a consensus in 
Congress that all of the interrelated issues must be 
reconsidered and revised. These include the benchmarks for 
determining funding levels and liabilities, mortality tables, 
and many more issues.
    Already there are several new components of reform on the 
table that must be considered. For example, the Bush 
Administration has proposed a yield curve approach for 
determining plan liabilities. This is a novel approach that is 
not fully understood and its effects have not been fully 
analyzed. Its impact on companies with older workforces could 
be very severe. How a new funding regime will impact markets 
and what effect new accounting rules will have are perhaps even 
more problematic. Simply put, it will take more than 2 years to 
build the policy and political consensus for the broad range of 
reforms that are needed.
    Permanent changes to the pension system will require 
bipartisan cooperation and thorough, time-consuming analysis of 
innovative proposals. The Pension Stability Act takes into 
account these needs for a longer time period to resolve these 
complex issues by adopting a 3-year period for a temporary 
solution.
    The temporary interest rate relief adopted by JCWAA was 
intended to provide Congress with time to devise a permanent 
solution. However, Congress has not acted to do so; nor has the 
administration come forward with comprehensive reform 
proposals. The committee is concerned that another 2 years of 
funding relief will lead to yet another 2-year extension in 
2005. While this may be convenient from a financial policy 
perspective, the impact on pension plans and employee benefits 
policy could be devastating. Companies are already fleeing from 
the defined benefit system because of cost, complexity and 
changing demographics. Adding uncertainty--as will be the case 
with periodic extenders--will only hasten the conversion to 
other benefits or no benefits programs.
    Finally, 3 years of temporary relief takes into account the 
realities of business planning cycles. Companies must meet 
long-term business planning goals--in order to obtain financing 
and to plan for future costs, they need as much information as 
early as possible about future pension funding obligations. 
Additionally, the timing of pension reforms will have a direct 
impact on labor relations because most collective bargaining 
agreements are at least 3 years in length. Three years of 
pension funding relief mirrors the terms of these agreements 
and provides greater certainty for employers and employees at 
the bargaining table.

                   BI-PARTISAN BLUE RIBBON COMMISSION

    The Pension Stability Act creates a Defined Benefit Plans 
Commission to review all outstanding issues, including all of 
the issues that the Bush Administration has put on the table, 
and report to Congress at the end of 2005. Members of the 
Commission, appointed by the President and chairmen and ranking 
members of the relevant committees in the Senate and House of 
Representatives, will be drawn from government, business, 
labor, and pension rights groups. The Blue Ribbon Commission 
demonstrates a clear commitment to responsible,comprehensive 
reform of the defined benefit system. Everything will be on the table 
at the Commission; all interested parties are expected to participate 
or be left out the solution.
    This commission is needed because too much money is at 
stake and the livelihood and security of too many Americans are 
at risk for these issues to be left purely to the political 
process. More importantly, however, is the view that these 
issues are too important, and the dollar figures too big, for 
an internal task force. Stakeholders in this debate include 
company financial and human resources officers, stock holders, 
pension plan participants and beneficiaries, unions, and 
financial markets. If they are not included in the process, 
they are more likely to oppose the proffered solutions.
    The Pension Stability Act ensures that the recommendations 
of the Blue Ribbon Commission are addressed by requiring 
congressional action within 120 days of the publication of the 
Commission's report. This guarantees that comprehensive, 
responsible pension reforms will be on the House and Senate 
floor by April of 2006.
    In summary, the Pension Stability Act solves the immediate 
problems of the pension system, while respecting the need for 
fiscal responsibility and ensuring that enactment of permanent 
solutions remains in the forefront of congressional attention.

                            V. Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, December 4, 2003.
Hon. Judd Gregg,
Committee on Health Education, Labor, and Pensions,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Pension Stability 
Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Geoffrey 
Gerhardt.
            Sincerely,
                                      Elizabeth M. Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Pension Stability Act

    Summary: The Pension Stability Act would make changes to 
the Employee Retirement Income Security Act of 1974 (ERISA) and 
the Internal Revenue Code that would affect the operations of 
private pension plans. Specifically, the bill would make 
changes to the way pension liabilities are calculated for 
certain pension plans, which would affect both pension 
contributions and premiums paid to the Pension Benefit Guaranty 
Corporation (PBGC).
    CBO and the Joint Committee on Taxation (JCT) estimate that 
enacting the bill would increase federal revenues by $4.9 
billion over the 2004-2008 period and reduce revenues by $190 
million over the 2004-2013 period. CBO estimates that the bill 
would increase direct spending by $367 million over the 2005-
2013 period. In addition, CBO estimates the bill would increase 
spending subject to appropriation by $1 million annually over 
the 2004-2006 period, assuming appropriation of the necessary 
amounts.
    CBO has reviewed the non-tax provisions of the bill and 
determined that they contain no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA). Those 
provisions also would impose no costs on state, local, or 
tribal governments.
    The bill would make changes to ERISA that would temporarily 
alter existing private-sector mandates related to the funding 
of private, defined-benefit pension plans. CBO estimates that 
the net effect of those provisions would be to reduce the 
direct cost of the mandates imposed by ERISA on plan sponsors.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the Pension Stability Act is shown in the 
following table. The costs of this legislation would fall 
within budget function 600 (income security).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      By fiscal year, in millions of dollars--
                                                           ---------------------------------------------------------------------------------------------
                                                             2004    2005    2006     2007      2008      2009      2010      2011      2012      2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   CHANGES IN REVENUES

Estimated Revenues........................................   2,719   3,636   1,137    -1,026    -1,566      -480    -1,136    -1,620    -1,045      -809

                                                               CHANGES IN DIRECT SPENDING

Estimated Budget Authority................................       0     132     102        82        26        25         0         0         0         0
Estimated Outlays.........................................       0     132     102        82        26        25         0         0         0         0

                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level.............................       1       1       1         0         0         0         0         0         0         0
Estimated Outlays.........................................       1       1       1         0         0         0         0         0         0         0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office and Joint Committee on Taxation.

    Basis of estimate: For the purposes of this estimate, CBO 
and JCT assume the bill will be enacted early in 2004.

Revenues

    The bill would temporarily replace the interest rate used 
in determining pension funding and variable-rate premiums paid 
to the PBGC. Under current law, such liabilities and premiums 
are determined using the interest rate on 30-year Treasury 
securities. The bill would replace that rate through December 
31, 2006, with the rate of interest on amounts conservatively 
invested in long-term corporate bonds. Because this change 
would reduce the contributions sponsors would have to make 
toward their pension plans, taxable profits would increase and 
yield higher tax receipts. JCT estimates that the bill would 
increase federal revenues by $2.7 billion in 2004 and by $4.9 
billion over the 2004-2008 period; it would reduce revenues by 
an estimated $190 million over the 2004-2013 period.

Direct Spending

    Temporary Replacement of the 30-Year Bond Rate. Under 
current law, pension plans are required to determine whether 
they are fully funded by discounting future pension liabilities 
using the interest rate based on the moving four-year average 
for 30-year Treasury bonds. Sponsors of plans that are 
considered underfunded must make contributions to their plans 
in addition to paying variable-rate premiums to the PBGC based 
on the amount of underfunding. The Pension Stability Act would 
allow plans to use interest rates on high-grade, long-term 
corporate bonds to discount their liabilities during plan years 
2004, 2005, and 2006. The exact rate to be used by plans would 
be determined by the Secretary of the Treasury.
    Interest rates on corporate bonds are generally higher than 
those on Treasury bonds. Using a higher interest rate to 
discount liabilities results in lower projections of the cost 
of future liabilities. Therefore, firms would have to 
contribute less to their plans and pay less in variable-rate 
premiums. Based on information provided by the PBGC, CBO 
assumes that the applicable corporate bond rate would be 
roughly 150 basis points higher than the interest rate on 30-
year Treasury bonds. CBO estimates that using this higher rate 
to discount liabilities would reduce the liabilities of 
underfunded plans by about $30 billion by plan-year 2007. As a 
result, we estimate that premium receipts would decrease by 
$367 million, or 4.7 percent, over the 2005-2013 period. 
Because the PBGC's premiums are offsetting collections to a 
mandatory spending account, reductions in premium receipts are 
reflected as increases in direct spending.
    The use of higher interest rates could have other effects 
on the PBGC's costs, but the direction and magnitude of these 
effects are uncertain. On the one hand, the use of higher 
interest rates to discount future liabilities would reduce 
sponsors' contributions, improve their financial position, and 
make it less likely that they would eventually become bankrupt. 
Thus, the policy might reduce the number of plans that the PBGC 
ultimately takes over. On the other hand, the lower 
contributions would mean that the underfunding for plans that 
eventually become the responsibility of the PBGC would be 
greater, thus adding to the agency's costs.

Spending Subject to Appropriation

    The legislation would establish a commission designed to 
study issues related to defined-benefit pension plans and issue 
a report by December 31, 2005. The commission would be composed 
of 11 representatives from the executive and legislative 
branches, plus two members of the public appointed by the 
President. Commission members would not be compensated for 
their work, but travel and other expenses would be paid for by 
various government agencies. Based on the experience of other 
commissions of similar scope, CBO judges that this provision 
would cost about $1 million annually over the 2004-2006 period.
    Estimated impact on state, local, and tribal governments: 
CBO has reviewed the non-tax provisions of the bill and 
determined that they contain no intergovernmental mandates as 
defined in UMRA. Those provisions also would impose no costs on 
state, local, or tribal governments.
    Estimated impact on the private sector: The bill would make 
changes to ERISA that would temporarily alter existing private-
sector mandates related to the funding of private, defined-
benefit pension plans. Changing the interest rate required to 
be used by plans to determine the present value of their 
pension obligations would reduce the direct cost of the 
mandates now imposed by ERISA on sponsors of pension plans.
    Previous CBO estimates: On November 21, 2003, CBO 
transmitted a cost estimate for H.R. 3108, the Pension Funding 
Equity Act of 2003, as passed by the House of Representatives 
on October 8, 2003. H.R. 3108 would replace the 30-year 
Treasury rate with a corporate bond rate for a period of two 
years (plan-years 2004 and 2005), rather than the three-year 
period specified by the Pension Stability Act. CBO estimated 
that H.R. 3108 would decrease premium receipts by $279 million 
over the 2005-2013 period and increase revenues by $304 million 
over the 2004-2013 period.
    On November 18, 2003, CBO transmitted a cost estimate for 
H.R. 1776, the Pension Preservation and Savings Expansion Act 
of 2003, as ordered reported by the House Committee on Ways and 
Means. H.R. 1776 contained various pension reform proposals, 
including a provision to replace the 30-year Treasury bond rate 
with a corporate bond rate for three years, the same period of 
time provided by the Pension Stability Act. CBO estimated that 
this provision of H.R. 1776 would decrease premium receipts by 
$469 million over the 2005-2013 period. The estimate for the 
Pension Stability Act differs from that for H.R. 1776 because 
CBO revised the methodology it used to determine premium 
receipts once the Treasury rate is reinstated.
    Estimate prepared by: Federal Revenues: Annabelle Bartsch; 
Federal Outlays: Geoffrey Gerhardt; Impact on State, Local, and 
Tribal Governments: Leo Lex; and Impact on the Private Sector: 
Daniel Wilmoth.
    Estimate approved by: Robert A. Sunshine, Assistant 
Director for Budget Analysis and G. Thomas Woodward, Assistant 
Director for Tax Analysis.

            VI. Application of Law to the Legislative Branch

    The bill amends laws that apply only to private pension 
plans and does not apply to the legislative branch.

                    VII. Regulatory Impact Statement

    The Pension Stability Act would make changes to the 
Employee Retirement Income Security Act of 1974 (ERISA) and the 
Internal Revenue Code that would affect the operations of 
private pension plans. The committee has determined the 
regulatory impact of these changes to be minimal.

                   VIII. Section-by-Section Analysis

Section 1. Title

    The bill provides that it may be cited at the ``Pension 
Stability Act.''

Section 2. Temporary replacement of interest rate on 30-year Treasury 
        securities with interest rate on conservatively invested long-
        term corporate bonds

    The legislation makes several changes to the Employee 
Retirement Income Security Act and the Internal Revenue Code of 
1986 to replace the 30-year Treasury bond rate with a composite 
corporate rate as the benchmark for determining certain pension 
obligations. The bill creates a special rule for the years 
2004, 2005, and 2006, during which the permissible range of 
interest rates and benchmark for determining current 
liabilities are different from current law. The permissible 
range is defined during this three-year period as 90 percent to 
100 percent of the new benchmark.
    The new benchmark shall be the weighted average of the 
conservative long-term corporate bond rates during the four-
year period ending on the last day before the beginning of the 
plan year. The Secretary of Labor, in consultation with the 
Secretary of the Treasury, is directed to determine the rate 
through regulations on the basis of two or more indices that 
are in the top two quality levels available reflecting average 
maturities of 20 years or more.
    The bill makes conforming amendments to repeal out-of-date 
lookback rules and clarifies that the appropriate rate in 2007 
shall be 105 percent of the 30-year Treasury bond rate.
    The bill extends the special rule for 2004, 2005, and 2006, 
for determining the interest rate for PBGC variable rate 
premiums in Section 4006(a)(3)(E)(iii) of ERISA.
    Finally, in adjusting a benefit in a form other than a 
straight life annuity for purposes of determining the annual 
benefit limit of a defined benefit plan under IRC Section 
415(b)(2)(E)(ii), the interest rate is changed from 5 percent 
to 5.5 percent.

Section 3. Commission on defined pension benefit plans

    The legislation establishes a 13-member bipartisan blue-
ribbon commission to consider reforms to the defined benefit 
system and to make recommendations to Congress. Membership in 
the commission includes the Secretaries of Labor and the 
Treasury, and the Director of the Pension Benefit Guaranty 
Corporation, or their designees, two members of the general 
public selected by the President, and one member each selected 
by the chair and ranking member of the Senate Health, 
Education, Labor, and Pensions Committee, the Senate Finance 
Committee, the House Education and the Workforce Committee, and 
the House Ways & Means Committee.
    The scope of the commission purview is broad, but clearly 
delineated. Among the commission's specific areas of inquiry 
are the following: How to reform the defined benefit funding 
and liability rules, the appropriate interest rates for valuing 
plan liabilities, variable rate premiums, lump sum 
distributions, the impact of reforms on investment policy and 
capital markets, appropriate mortality assumptions, including 
collar adjustments, appropriate transition protections and the 
need to avoid volatility, and how to create incentives and 
avoid disincentives to the creation and expansion of defined 
benefit plans.
    The commission is empowered to conduct public hearings, 
receive testimony, and make comprehensive legislative 
proposals. It must report its findings and recommendations to 
Congress by December 31, 2005.

Section 4. Congressional action

    The bill provides that Congress must act on the 
recommendations of the defined benefit commission within 120 
days after receipt of the commission's report.

Section 5. Effective dates

    In general, the amendments in the legislation providing a 
temporary replacement interest rate become effective for plan 
years beginning after December 31, 2003.
    For purposes of applying certain rules (``lookback rules'') 
to plan years beginning after December 31, 2003, the amendments 
made by the provisions may be applied as if they had been in 
effect for all years beginning before the effective date. For 
purposes of the provision, ``lookback rules'' means: (1) the 
rule under which a plan is not subject to the additional 
funding requirements for a plan year if the plan's funding 
current liability percentage was at least 90 percent for each 
of the two immediately preceding plan years or each of the 
second and third immediately preceding plan years; and (2) the 
rule under which quarterly contributions are required for a 
plan year if the plan's funded current liability percentage was 
less than 100 percent for the preceding plan year. The 
amendments made by the provision may be applied for purposes of 
the lookback rules, regardless of the funded current liability 
percentage reported for the plan on the plan's annual reports 
(i.e., Form 5500) for preceding years.
    A one-year transition rule is provided to ensure that no 
person shall receive a lesser amount due to the change in 
prescribed interest rate under IRC Section 415.
    Finally, amendments made by the legislation shall not apply 
to plan years beginning after December 31, 2006.

                      IX. Changes in Existing Law

    In compliance with rule XXVI paragraph 12 of the Standing 
Rules of the Senate, the following provides a print of the 
statute or the part or section thereof to be amended or 
replaced (existing law proposed to be omitted is enclosed in 
black brackets, new matter is printed in italic, existing law 
in which no change is proposed is shown in roman.)

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

           *       *       *       *       *       *       *

PENSION STABILITY ACT

           *       *       *       *       *       *       *

Subchapter I--Protection of Employee Benefit Rights

           *       *       *       *       *       *       *

                    Subtitle B--Regulatory Provisions

     * * * * * * *

                 Part 5--Administration and Enforcement

     * * * * * * *
519. Commission on Defined Pension Benefit Plans.
     * * * * * * *

                       MINIMUM FUNDING STANDARDS

    Sec. 302. (a)(1) * * *

           *       *       *       *       *       *       *

    (b) * * *

           *       *       *       *       *       *       *

          (5) * * *

           *       *       *       *       *       *       *

                  (B) * * *

           *       *       *       *       *       *       *

                          (ii) * * *
                                  (I) In general.--Except as 
                                provided in subclause (II) or 
                                (III), the term ``permissible 
                                range'' means a rate of 
                                interest which is not more than 
                                10 percent above, and not more 
                                than 10 percent below, the 
                                weighted average of the rates 
                                of interest on 30-year Treasury 
                                securities during the 4-year 
                                period ending on the last day 
                                before the beginning of the 
                                plan year.
                                  (II) Special rule for years 
                                2004, 2005, and 2006.--In the 
                                case of plan years beginning 
                                after December 31, 2003, and 
                                before January 1, 2007, the 
                                term ``permissible range'' 
                                means a rate of interest which 
                                is not above, and not more than 
                                10 percent below, the weighted 
                                average of the conservative 
                                long-term corporate bond rates 
                                during the 4-year period ending 
                                on the last day before the 
                                beginning of the plan year. The 
                                Secretary, in consultation with 
                                the Secretary of the Treasury, 
                                shall, by regulation, prescribe 
                                a method for periodically 
                                determining conservative long-
                                term bond rates for purposes of 
                                this subclause. Such rates 
                                shall reflect the rates of 
                                interest on amounts 
                                conservatively invested in 
                                long-term corporate bonds and 
                                shall be based on the use of 2 
                                or more indices that are in the 
                                top 2 quality levels available 
                                reflecting average maturities 
                                of 20 years or more.
                                  [(II)] (III) Secretarial 
                                authority.--If the Secretary 
                                finds that the lowest rate of 
                                interest permissible under 
                                subclause (I) or (II) is 
                                unreasonably high, the 
                                Secretary may prescribe a lower 
                                rate of interest, except that 
                                such rate may not be less than 
                                80 percent of the average rate 
                                determined under [subclause 
                                (I)] such subclause.

           *       *       *       *       *       *       *

    (d) * * *

           *       *       *       *       *       *       *

          (7) * * *

           *       *       *       *       *       *       *

                  (C) * * *
                          (i) * * *

           *       *       *       *       *       *       *

                                  (IV) Special rule for 2004, 
                                2005, and 2006.--For plan years 
                                beginning in 2004, 2005, or 
                                2006, notwithstanding subclause 
                                (I), the rate of interest used 
                                to determine current liability 
                                under this subsection shall be 
                                the rate of interest under 
                                subsection (b)(5).

           *       *       *       *       *       *       *

    (e) * * *
          (1) * * *

           *       *       *       *       *       *       *

          [(7) Special rules for 2002 and 2004.--In any case in 
        which the interest rate used to determined current 
        liability is determined under subsection 
        (d)(7)(C)(i)(III)--
                  [(A) 2002.--For purposes of applying 
                paragraphs (1) and (4)(B)(ii) for plan years 
                beginning in 2002, the current liability for 
                the preceding plan year shall be redetermined 
                using 120 percent as the specified percentage 
                determined under subsection (d)(7)(C)(i)(II).
                  [(B) 2004.--For purposes of applying 
                paragraphs (1) and (4)(B)(ii) for plan years 
                beginning in 2004, the current liability for 
                the preceding plan year shall be redetermined 
                using 105 percent as the specified percentage 
                determined under subsection (d)(7)(C)(i)(II).]
          (7) Special rule for 2007.--For purposes of applying 
        paragraphs (1) and (4)(B)(ii) for plan years beginning 
        in 2007, current liability for the preceding plan year 
        shall be redetermined using 105 percent of the annual 
        rate of interest on 30-year Treasury securities for 
        such preceding plan year as the specific percentage 
        determined under subsection (d)(7)(C)(i)(II).

           *       *       *       *       *       *       *

PART 5--ADMINISTRATION AND ENFORCEMENT

           *       *       *       *       *       *       *

SEC. 519. COMMISSION ON DEFINED PENSION BENEFIT PLANS.

    (a) Establishment of the Commission.--
          (1) Establishment.--There is established, subject to 
        the Federal Advisory Committee Act, the Commission on 
        Defined Benefit PensionPlans (in this section referred 
to as the ``Commission'').
          (2) Membership.--The Commission shall be composed of 
        13 members of whom--
                  (A) 1 shall be the Secretary or their 
                designee;
                  (B) 1 shall be the Secretary of the Treasury 
                or their designee;
                  (C) 1 shall be the Executive Director of the 
                Pension Benefit Guaranty Corporation or their 
                designee;
                  (D) 2 shall be appointed by the President 
                from among members of the general public;
                  (E) 1 shall be appointed by the chairman of 
                the Committee on Health, Education, Labor, and 
                Pensions of the Senate;
                  (F) 1 shall be appointed by the ranking 
                minority member of the Committee on Health, 
                Education, Labor, and Pensions of the Senate;
                  (G) 1 shall be appointed by the chairman of 
                the Committee on Finance of the Senate;
                  (H) 1 shall be appointed by the ranking 
                minority member of the Committee on Finance of 
                the Senate;
                  (I) 1 shall be appointed by the chairman of 
                the Committee on Education and the Workforce of 
                the House of Representatives;
                  (J) 1 shall be appointed by the ranking 
                minority member of the Committee on Education 
                and the Workforce of the House of 
                Representatives;
                  (K) 1 shall be appointed by the chairman of 
                the Committee on Ways and Means of the House of 
                Representatives; and
                  (L) 1 shall be appointed by the ranking 
                minority member of the Committee on Ways and 
                Means of the House of Representatives.
          (3) Period of appointment; vacancies.--Members shall 
        be appointed for the life of the Commission. Any 
        vacancy in the Commission shall not affect its powers, 
        but shall be filled in the same manner as the original 
        appointment.
          (4) Quorum.--A majority of the members of the 
        Commission shall constitute a quorum, but a lesser 
        number of members may hold hearings.
          (5) Chairperson and vice chairperson.--The Commission 
        shall select a Chairperson and Vice Chairperson from 
        among its members.
    (b) Duties of the Commission.--
          (1) Study and recommendations.--The Commission shall 
        conduct a thorough study of, and shall develop 
        recommendations on, the following issues relating to 
        defined benefit pension plans:
                  (A) How to reform the defined benefit pension 
                plan funding rules to increase participants' 
                benefit security, provide rational and 
                predictable funding rules for employers, and 
                protect the financial independence of the 
                Pension Benefit Guaranty Corporation.
                  (B) The relevance and effectiveness of the 
                current liability rules, and, if such rules are 
                maintained, an analysis of alternative 
                valuation measures for those rules, including 
                the rationale for the measures as well as their 
                strengths and weaknesses.
                  (C) The appropriate interest rates that 
                should be used in valuing plan liabilities, the 
                variable rate premium, and lump-sum benefits, 
                including whether the rates proposed are 
                transparent, widely understood, publicly 
                available, and resistant to manipulation.
                  (D) Whether the recommended interest rate 
                would impact the investment policy of the 
                pension trust along with an analysis of 
theimpact on capital markets, the cost of maintaining a pension plan 
over the long term, and the compatibility of any effect on investment 
policy with the fiduciary requirements to diversify investments under 
this Act.
                  (E) The appropriate mortality assumptions 
                that should be used in valuing plan 
                liabilities.
                  (F) whether such assumptions should contain a 
                collar adjustment or should otherwise be 
                adjusted to reflect the workforce covered by 
                the plan.
                  (G) A consideration of other actuarial 
                assumptions used in valuing plan liabilities.
                  (H) Whether the same interest rate should be 
                used for purposes of both funding and lump sum 
                benefits, including consideration of the effect 
                on plan funding and other purposes for which 
                the interest rate is used if such rate is 
                different for those purposes.
                  (I) The effect of the interest rate on 
                participants' decisions whether to elect lump 
                sum benefits.
                  (J) The appropriate means of providing 
                transition protection to participants in the 
                event changes are enacted.
                  (K) Whether the same interest rate used for 
                funding purposes should also apply for other 
                purposes for which the rate of interest on 30-
                year Treasury securities is currently used.
                  (L) The need to avoid volatile funding 
                obligations and how to reform the law to avoid 
                such volatility, including volatility 
                attributable to the recent downturn in the 
                equity markets and significant decrease in 
                interest rates.
                  (M) The need for predictability, simplicity, 
                and transparency with respect to the 
                calculation of funding obligations, and how to 
                reform the law to achieve such goals.
                  (N) Effective means that would provide for 
                additional funding in favorable economic 
                periods, so that funding levels can withstand 
                market downturns without requiring large 
                contributions during adverse economic 
                conditions.
                  (O) How to design transition rules so that 
                funding reforms do not cause short-term 
                hardships for employers or employees.
                  (P) How to ensure that revisions to funding 
                obligations do not discourage employers from 
                maintaining pension plans.
                  (Q) How to ensure that required disclosure of 
                funding information is material and relevant 
                without requiring disclosures that impose 
                disclosure requirements that are unnecessarily 
                burdensome, are misleading with respect to the 
                funded status of an ongoing plan, or are not 
                adjusted to reflect the size of the plan.
                  (R) Other funding and benefit reforms that 
                would promote the creation and expansion of 
                defined benefit plans.
          (2) Report.--Not later than December 31, 2005, the 
        Commission shall submit a report to the appropriate 
        committees of Congress containing a detailed statement 
        of the findings and conclusions of the Commission, 
        together with the recommendations for such legislation 
        as it considers appropriate (including proposed 
        legislative language to implement the recommendations).
    (c) Powers of the Commission.--
          (1) Hearings.--The Commission may hold such hearings, 
        sit and act at such times and places, take such 
        testimony, and receive such evidence asthe Commission 
considers advisable to carry out this section. The Commission shall, to 
the maximum extent possible, use existing data and research prior to 
holding such hearings.
          (2) Information from federal agencies.--The 
        Commission may secure directly from any Federal 
        department or agency such information as the Commission 
        considers necessary to carry out this section. Upon 
        request of the Chairperson of the Commission, the head 
        of such department or agency shall furnish such 
        information to the Commission.
          (3) Postal services.--The Commission may use the 
        United States mails in the same manner and under the 
        same conditions as other departments and agencies of 
        the Federal Government.
    (d) Commission Personnel Matters.--
          (1) Compensation; travel expenses.--Each member of 
        the Commission shall serve without compensation but 
        shall be allowed travel expenses, including per diem in 
        lieu of subsistence, at rates authorized for employees 
        of agencies under subchapter I of chapter 57 of title 
        5, United States Code, while away from their homes or 
        regular places of business in the performance of 
        services for the Commission.
          (2) Staff and equipment.--The Pension Benefit 
        Guaranty Corporation shall provide all financial, 
        administrative, and staffing requirements for the 
        Commission, including--
                  (A) office space;
                  (B) furnishings; and
                  (C) equipment.
    (e) Termination of the Commission.--The Commission shall 
terminate 180 days after the date on which the Commission 
submits its report under subsection (b)(2).

           *       *       *       *       *       *       *

               Subchapter III--Plan Termination Insurance

            Subtitle A--Pension Benefit Guaranty Corporation

SEC. 1306. PREMIUM RATES.

    (a) Schedules for Premium Rates and Bases for Application; 
Establishment, Coverage, etc.--
          (1) * * *

           *       *       *       *       *       *       *

          (3)(A) * * *

           *       *       *       *       *       *       *

          (E)(i) * * *

           *       *       *       *       *       *       *

          (iii) * * *
                  (I) * * *

           *       *       *       *       *       *       *

                  (V) In the case of plan years beginning after 
                December 31, 2003, and before January 1, 2007, 
                the annual yield taken into account under 
                subclause (II) shall be the annual yield 
                determined by the Secretary on amounts 
                conservatively invested in long-term corporate 
                bonds for the month preceding the month in 
                which the plan year begins. For purposes of the 
                preceding sentence, the Secretary, in 
                consultation with the Secretary of the 
                Treasury, shall, by regulation, prescribe a 
                method for periodically determining 
                conservative long-term bond rates. Such rates 
                shall reflect the rates of interest on amounts 
                conservatively invested in long-term corporate 
                bonds and shall be based on the use of 2 or 
                more indices that are in the top 2 quality 
                levels available reflecting average maturities 
                of 20 years or more.

                         INTERNAL REVENUE CODE

SEC. 412. MINIMUM FUNDING STANDARDS.

    (a) General Rule.-- * * *
    (b) * * *

           *       *       *       *       *       *       *

          (5) * * *

           *       *       *       *       *       *       *

                  (B) * * *

           *       *       *       *       *       *       *

                          (ii) * * *
                                  (I) In general.--Except as 
                                provided in subclause (II) or 
                                (III), the term ``permissible 
                                range'' means a rate of 
                                interest which is not more than 
                                10 percent above, and not more 
                                than 10 percent below, the 
                                weighted average of the rates 
                                of interest on 30-year Treasury 
                                securities during the 4-year 
                                period ending on the last day 
                                before the beginning of the 
                                plan year.
                                  (II) Special rule for 2004, 
                                2005, and 2006.--In the case of 
                                plan years beginning after 
                                December 31, 2003, and before 
                                January 1, 2007, the term 
                                ``permissible range'' means a 
                                rate of interest which is not 
                                above, and not more than 10 
                                percent below, the weighted 
                                average of the conservative 
                                long-term corporate bond rates 
                                during the 4-year period ending 
                                on the last day before the 
                                beginning of the plan year. The 
                                Secretary of Labor, in 
                                consultation with the 
                                Secretary, shall, by 
                                regulation, prescribe a method 
                                for periodically determining 
                                conservative long-term bond 
                                rates for purposes of this 
                                paragraph. Such rates shall 
                                reflect the rates of interest 
                                on amounts conservatively 
                                invested in long-term corporate 
                                bonds and shall be based on the 
                                use of 2 or more indices that 
                                are in the top 2 quality levels 
                                available reflecting average 
                                maturities of 20 years or more.
                                  [(II)] (III) Secretarial 
                                authority.--If the Secretary 
                                finds that the lowest rate of 
                                interest permissible under 
                                subclause (I) or II is 
                                unreasonably high, the 
                                Secretary may prescribe a lower 
                                rate of interest, except that 
                                such rate may not be less than 
                                80 percent of the average rate 
                                determined under [subclause 
                                (I)] such subclause.

           *       *       *       *       *       *       *

    (l) Additional Funding Requirements for Plans Which Are Not 
Multiemployer Plans.--
          (7) * * *

           *       *       *       *       *       *       *

                  (C) * * *
                          (i) * * *
                                  (I) * * *
                                  (IV) Special rule for 2004, 
                                2005, and 2006.--For plan years 
                                beginning in 2004, 2005, or 
                                2006, notwithstanding subclause 
                                (I), the rate of interest used 
                                to determine current liability 
                                under this subsection shall be 
                                the rate of interest under 
                                subsection (b)(5).

           *       *       *       *       *       *       *

    (m) Quarterly Contributions Required.--
          (1) In general.-- * * *

           *       *       *       *       *       *       *

          [(7) Special rules for 2002 and 2004.--In any case in 
        which the interest rate used to determine current 
        liability is determined under subsection 
        (l)(7)(C)(i)(III)--
                  [(A) 2002.--For purposes of applying 
                paragraphs (1) and (4)(B)(ii) for plan years 
                beginning in 2002, the current liability for 
                the preceding plan year shall be redetermined 
                using 120 percent as the specified percentage 
                determined under subsection (l)(7)(C)(i)(II).
                  [(B) 2004.--For purposes of applying 
                paragraphs (1) and (4)(B)(ii) for plan years 
                beginning in 2004, the current liability for 
                the preceding plan year shall be redetermined 
                using 105 percent as the specified percentage 
                determined under subsection (l)(7)(C)(i)(II).]
          (7) Special rule for 2007.--For purposes of applying 
        paragraphs (1) and (4)(B)(ii) for plan years beginning 
        in 2007, current liability for the preceding plan year 
        shall be redetermined using 105 percent of the annual 
        rate of interest on 30-year Treasury securities for 
        such preceding plan year as the specific percentage 
        determined under subsection (l)(7)(C)(i)(II).

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED 
                    PLANS.

    (a) General Rule.--

           *       *       *       *       *       *       *

    (b) * * *

           *       *       *       *       *       *       *

          (2) * * *

           *       *       *       *       *       *       *

                  (E) * * *

           *       *       *       *       *       *       *

                          (ii) For purposes of adjusting any 
                        benefit under subparagraph (B) for any 
                        form of benefit subject to section 
                        417(e)(3), [the applicable interest 
                        rate (as defined in section 417(e)(3))] 
                        5.5 percent shall be substituted for 
                        ``5 percent'' in clause (i).

           *       *       *       *       *       *       *

                                
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