US - Employers would be forced to make good on past pension promises and pay more for federal insurance under plans outlined by US secretary of Labor Elaine Chao to overhaul the private DB pension system and prop up the government's pension insurance agency.
Under the proposal, companies would be stopped from promising retirement benefits they cannot afford and those with underfunded pension plans would pay higher premiums for federal insurance based on risk of termination.
Chao, who is also chair of the federal pension insurer, the Pension Benefit Guaranty Corporation (PBGC), said about US$1.8trn of the nation’s pension assets were in traditional DB plans that cover 20% of the workforce or about 34m people.
“This administration proposes to do away with the confusion by replacing the multiple measures of pension liabilities with one basic concept,” she said. “The goal is to ensure that the assumptions that go into measuring a plan’s liability better reflect whether or not it will be terminated. That way, if a pension plan is terminated, the money will be there to pay benefits.”
In November, the PBGC recorded a record deficit of US$23.3bn for private, single-employer pension plans. While Chao emphasised the insurer was not in “immediate danger of collapse”, she warned urgent action was needed to address the current pension shortfall.
“For healthy pension plans the administration proposes to adjust the flat rate premium, which hasn’t been increased since 1991. And the administration proposes to index the flat rate premium to the growth in worker’s wages,” she said.
“For financially troubled companies with underfunded plans, the proposal strengthens premiums based on level of risk, in other words, the greater the risk, the higher the premium.”
The PBGC would be allowed to adjust the risk-based premiums periodically.
Lastly, under the plan, the government would increase disclosure to improve transparency, giving workers, investors and regulators more information about the financial health of DB pension plans.
“These proposals will ensure the financial integrity of the federal insurance system that protects these plans and they will help ensure that defined benefit plans remain an option for workers,” Chao stated.
Legislators are expected to use the proposal as a basis for forming a Bill this year.
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