Just before the July 4^th holiday recess began, the House and Senate passed a bipartisan Highway conference agreement bill (H.R. 4348) entitled “Map-21,” a bill that President Obama is expected to sign into law this week. Since this package is likely one of the last pieces of legislation to pass both chambers before the November elections, the bill was packed with non-transportation related provisions, including an extension of the current student loan interest rate, and several pension-related provisions. Pension funding stabilization and an increase to Pension Benefit Guarantee Corporation (PBGC) premiums were included in the final conference agreement, in part, to foot the bill for this pre-election legislative package, which would have otherwise cost over $20 billion.

 

The highway bill had been stuck in conference committee deliberations that seemed unlikely to move forward with a compromise. That was Senate Majority Leader Harry Reid floated an idea was to pay for the expiring highway provisions, as well as the gridlocked student loan bill, with pension offsets.

 

A provision to stabilize the interest rate funding rules for private sector pension plans, or pension funding stabilization, had already passed the Senate in March of this year in their iteration of the highway legislation. Over 200 companies and associations, including the Financial Executives International (FEI) Committee on Benefits Finance urged Congress in a May 15^th letter to immediately enact this provision. Stabilization is vitally important since historically low interest rates are placing strain on companies with pension plans because low rates translate into high estimates of pension liability, causing unnecessary pension contributions that could otherwise be spent on job creating capital investments.

 

Like the Senate-passed bill, the pension funding stabilization provision includes in the final highway conference agreement would allow companies beginning in 2012 to use a segment discount rate within 10% of a 25-year average of previous segment rates. This corridor increases by five percent each year (e.g. 15% for 2013 and 20% for 2014) until reaching 30% in 2016. The conference agreement also adds requirements that companies taking advantage of this stabilizing provision provide additional disclosures in the annual funding notice. As companies take advantage of stabilization, they will be paying more taxes to the federal government, because less funds will be going toward pension contributions, thus this provision is estimated to raise over $9 billion to help pay for the underlying measure.

 

The other major pension-related provision included in the final bill is an increase in PBGC premiums. FEI has been actively opposed to significant increases in PBGC premiums ever since the President’s fiscal year 2012 budget proposal recommended that the PBGC be given the authority to set their own premiums and that these premiums should be increased enough to bring in $16 billion in revenue to the federal government over the next 10 years. This increase would effectively be a tax on those companies offering defined benefit pension plans to their employees.

 

While the conference agreement does not allow the PBGC to set their own premiums, Congress did hike premiums in the following ways: flat rate premiums would be increased from the current $35 per participant to $42 in 2013 and $49 per participant in 2014, with indexing for inflationary increases after; variable rate premium rates are also increased by $4 per $1,000 of unfunded vested benefits for 2014 and by $5 for 2015, applied to the rate applicable for the preceding year, but this is subject to a cap; and multiemployer flat rate premiums are increased by $2 for 2013. Overall, the PBGC provision raises approximately $10.6 billion, to cover the additional costs in H.R. 4348.

 

Many senior financial executives able to take advantage of the pension funding stabilization provision have been following this issue closely and are pleased that this legislative package has finally cleared Congress. For companies, the increase to PBGC premiums on the other hand, while not as onerous as the hike originally called for by the administration, means an added cost burden for providing employees with pension benefits.