The country inaugurates President-elect Barack Obama this month and swears in a shored-up Democratic majority in Congress. On their first day of work, these lawmakers will inherit an economy reeling from job losses, market volatility and a global credit crunch. The Obama administration and leaders on Capitol Hill have suggested that comprehensive health care reform and a national energy policy -- prominent elements of the 2008 campaigns -- would stimulate and strengthen the broader economy.
There is a more urgent matter brewing, however, that is an integral part of economic recovery and must be addressed immediately.
The new funding rules prescribed by the Pension Protection Act of 2006 made the financial obligations of defined benefit plan sponsors far more sensitive to even modest changes in interest rates or the stock market. Of course, the market turmoil of the past few months has been anything but modest. The sudden market decline and volatility not only had the effect of severely devaluing these plans' pension assets, it also drained companies' financial reserves and further exacerbated the credit squeeze.
Billions of dollars hang in the balance, with companies struggling to cover their shortfalls and maintain their businesses while meeting these unplanned and onerous funding requirements. Plan freezes, always the last resort, would only save money going forward; to pour large, unexpected amounts into pension plans would divert resources away from growth, infrastructure and jobs.
In response to this threat, plan sponsors urged Congress to enact important relief measures, including:
- Allowing pension plans to smooth out unexpected asset losses. In the PPA, Congress permitted pension plans to recognize unexpected asset gains and losses over 24 months. Treasury misinterpreted Congress' intent, however, and effectively applied a mark-to-market rule to pension plans.
- Permitting a wider "corridor" for full asset smoothing. The PPA only allowed unexpected gains and losses to be smoothed out to a very limited extent -- within only 10 percent of fair market value. Companies asked that smoothing be permitted beyond 10 percent, maximizing the value of smoothing and predictability.
- Easing the transition to the new funding rules. Companies suggested holding the "funding target" for all pension plans at 92 percent for 2009, with plans at and below the target eligible for transition relief.
- Allowing all new funding elections for 2009 or 2010. Although funding methods, such as which type of yield curve to use, generally must remain constant absent IRS approval, companies sought permission to change funding methods for 2009 and 2010 without IRS approval.
In early November, more than 350 companies, unions and trade associations signed a letter to Congress requesting immediate funding relief. While congressional leaders worked toward a narrow compromise including these provisions, they were unable to reach agreement during the November "lame-duck" session.
As of this writing, it appears that Congress will return for another brief session in December and hopefully legislators will appreciate the urgency of pension relief measures. It may be that lawmakers choose to provide some narrow relief with the expectation that additional measures can be considered later. Either way, it will fall to President Obama and the 111th Congress to fully address this crisis when the new legislative year begins. For plan sponsors close to the brink -- and anyone who relies on America's economy, and anyone with a job -- they can only hope that it's soon enough.
