Several pension issues important to manufacturers were front and center this week during a House Ways and Means Subcommittee hearing on Private Employer Defined Benefit Pension Plans.
Subcommittee Chairman Pat Tiberi (R-OH) outlined his interest in private pension issues during his opening statement, explaining that his focus for the hearing would examine problems facing both multiemployer and single employer pension plans.
Multiemployer defined benefit (DB) pension plans are those sponsored by more than one employer and maintained as part of a collective bargaining agreement. In recent years, more employers have left these plans either voluntarily — requiring the payment of a significant “withdrawal liability” — or through bankruptcy. As one witness at the hearing explained, the employers left in the plan are responsible for the risk of others leaving the system. Over the next twenty years, a few large multiemployer plans are expected to become insolvent, and the insurance backstop for the multiemployer plan system, the PBGC, may not have the resources necessary to cover plan participants if these larger plans go under.
Several committee members acknowledged the difficulties facing multiemployer plans and asked witnesses how Congress could best solve the problem. Witnesses responded that recommendations of the National Coordinating Committee for Multiemployer Plans, entitled “Solutions not Bailouts,” would be an important roadmap for reform. Manufacturers that sponsor multiemployer pension plans urge Congress to move forward on reforms now to provide certainty for the future of the multiemployer pension plan system for workers and employers alike.
Another area in need of reform addressed at the hearing deals with the nondiscrimination rules for single employer pension plans set up to prevent bias toward more highly compensated participants, an area we have blogged about previously. As more employers transition from DB pension plans to 401(k) and other defined contribution (DC) plans, many have done so gradually by closing their DB plan to new hires (and offering these new workers a DC retirement plan instead) but allowing existing employees to remain in the DB plan. Unfortunately, these plans would naturally violate nondiscrimination testing rules over time as the existing employees advance in their careers and become more highly compensated. Without a change to the current rules, companies may be forced to completed close their DB plans to avoid tripping the test.
While the IRS has provided temporary relief for these plans, the NAM wrote to the IRS seeking a permanent solution. Manufacturers applaud the leadership of Congressmen Tiberi and Richard Neal (D-MA) in introducing a bill (H.R. 5381) to alleviate the nondiscrimination problem once and for all. The NAM urges Congress to pass this bill as soon possible.
Attention was also given during the hearing to the significant costs associated with sponsoring DB plans. We have written many times before about the financial burden of PBGC premiums, but the hearing touched on a new issue that could increase pension liabilities for manufacturers in the future: updated mortality tables. Approximately every ten years, the Treasury Secretary must review applicable “mortality rates” for plan funding requirements. As a major component of this effort, the Society of Actuaries (SOA) has worked to update mortality table data, which the IRS will later review for use in calculating funding liabilities. The SOA released a draft in February and is expected to finalize their new mortality study this October, which will reflect that plan participants are living longer than they were a decade ago. With this longer lifespan comes a potential increase (of 4 to 8 percent depending on plan demographics) in plan liability calculations for plan sponsors. The NAM will continue to work to share information with manufacturers about this effort and the potential for higher costs associated with their DB plans in the future.