US - Congress must recognise the legitimacy of cash balance or hybrid pension plans or risk a mass exodus of companies from the defined benefit pension system, the American Benefits Council has warned.
Responding to proposals released by the Bush administration this week, council president James Klein (pictured) said the DB system needed funding rules that would meet the dual objectives of “restoring the fiscal integrity” of the federal insurer, the Pensions Benefit Guarantee Corporation (PBGC), without “driving companies out of the system”.
Under the plans, unveiled by US secretary of Labor and PBGC chair Elaine Chao on Monday, companies would be forced to fully fund their retirement promises and financially troubled companies compelled to pay higher insurance premiums based on the risk of their pension plan terminating.
Klein said: “[Hybrid] plans have been vigorously attacked in Congress and in the courts as being discriminatory against older workers and those employers who are adopting those plans feel that frankly, they’re the good guys, they’re the companies who are staying within the defined benefit pension system.
“We think that Congress absolutely needs to clarify that these [hybrid] plans are legitimate non-discriminatory plans. Those plans represent 20% of the premium dollars that the PBGC gets – if Congress doesn’t act quickly to make clear that those are legitimate plans those plans are going to exit the system and certainly no new ones will be established, and that’s going to hurt the PBGC, to say nothing about the impact on workers and retirees.”
Klein was also wary of the proposed risk-based premium structure which would take into account the overall creditworthiness of a company, in addition to how underfunded their pension plan is.
“In general, we embrace the idea that more of the premium should come from the risk-based portion paid by underfunded plans,” he said. “But we are concerned that the risk-based portion could become so onerous that it would drive companies to deciding to terminate those underfunded plans.”
The council is an advocate of employer-sponsored benefit programs and has been actively involved in efforts over the years to salvage the nation’s defined benefit pension system.
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