Senate working on the interest rate change (and other relief)

[MGB]

For those of you that have never watched our "great deliberative body" in action (actually, they have been on this bill since last Thursday but have only discussed it for about 15 minutes in between babbling about other things not relevant to the bill), the Senate vote is on CSpan:

http://www.c-span.org/watch/cspan2_rm.asp?Cat=TV&Code=CS2

Currently they are in a quorum call (a delay tactic) for Arlen Spector to have time to argue with Finance Committee leadership to allow his amendment to reinstate the US Airway pilot's plan with a 30-year amortization of their DRC, instead of continuing its turnover to the PBGC. Yesterday, the amendment was blocked as not germane.

(The above link tries to use RealPlayer. There is also a link on the right of the screen to use Windows MediaPlayer. This is all on CSpan2 in case you have cable access.)

[AndyH]

MGB, have you seen the fine print of any of this legislation enough to guess where the rate may end up? Is this still to be left to the IRS to develop a formula, or is it contained in the legislation? I understand that the House and Senate versions differ, but do you have any insight into where this may end up?

[MGB]

The interest rate portions of the bills are identical so whatever passes should not change this part. The difference in the bills are the additional sections that the Senate added on DRC, multiemployer, and Greyhound relief along with new participant notice requirements for all multiemployer plans every year on their financial condition. The House actually passed a couple of bills with additional provisions that may end up in whatever passes.

When we developed the original interest rate proposal at ERIC, we suggested four broad-based, well-known indices. Using Moody's Aa, Merrill Lynch 10+ Aaa/Aa, Solomon 10+, and Lehman Aa, the rate for January 2004 would be 6.53%.

However, the final legislation directs the Treasury to use two or more indices. By decreasing from four to two indices (unknown how many they will actually use), there could be more weight towards the Aaa bonds and end up with a lower rate (could be closer to 6%). Once the bill passes, the Treasury plans to issue proposed regulations on how they will do this. So, there will be another delay for the comment period and final regulation before we know the actual rate.

If you are subscribed to the AAA Action Alert for pensions practitioners, I think Ron has been sending out a huge spreadsheet each month to that list. The averaged index I described above is in the tab "data(2)", column AR.

[david rigby]

If you want to read the versions, search here http://thomas.loc.gov/ for HR3108.

[mwyatt]

Can anyone indicate how these bills will impact IRC 417 minimum lump sums (and also maximum 415 lump sums)? My cursory reading of the bills indicates that these changes to corporate bonds are more in line of modifying the rates used for current liability purposes. Don't see anything referencing changes for 417 payouts. Also, any changes possibly in the works for calculation of PBGC premiums?

BTW, "Funds for Rebuilding Fish Stocks"? An example of legislation as sausage making?

[david rigby]

Currently, no version modifies the 417 rate. Look again; they all modify ERISA Section 4006(a)(3)(E) to determine the PBGC variable premium liability.

[Guest Steve C]

Looks like the PBGC premium calc would be subject to the new interest rate, but only after adjustment by the "applicable percentage" (now back to 85%).

I have clients who would love to see the 100% factor restored, but given PBGC's financial condition that would be a surprise.

[MGB]

The bill also changes 415 calculations. I refuse to even attempt to explain what it does with the 5.5% rate once you factor in the transition rule. (I came up with examples where the lump sum is higher and examples where the lump sum is lower than they otherwise would be under current law.) This is the type of language that removes hair from your head extremely fast as you try and comprehend the byzantine approach they are doing.

[WDIK]

For the moderately literate:

byzantine - a : of, relating to, or characterized by a devious and usually surreptitious manner of operation <a Byzantine power struggle> b : intricately involved.

For those like me that are less than moderatley literate:

surreptitious - done, made, or acquired by stealth

(I hate it when I have to look up definitions of words in the definitions themselves!)

[AndyH]

ok, now, who is going to look up stealth first?

[david rigby]

See "Congress"

"There ought to be one day-- just one-- when there is open season on senators."

Will Rogers

[Effen]

OK, I'm feeling a little stupid, but I'm not quit grasping what the intent of this "multi-employer relief" is. It seems like they are letting multi-employers use a 15-year amortization period for gains and losses, but they already use a 15-yr period. How will this provide relief? Are they saying you get a fresh 15 years on any of the last 3 loss bases?

Following is Sec. 5 from the bill:

F) AMORTIZATION HIATUS-

`(i) IN GENERAL- If a multiemployer plan has a net experience loss for any plan year beginning after June 30, 2002, and before July 1, 2006--

`(I) the plan may elect to have the 15-year amortization period under paragraph (2)(B)(iv) with respect to the loss begin in any plan year selected by the plan from among the 3 immediately succeeding plan years, and

`(II) if the plan makes an election under subclause (I) for any plan year, the net experience loss for the year shall, for purposes of determining any charge to the funding standard account, or interest, with respect to the loss, be treated in the same manner as if it were a net experience loss occurring in the year selected by the plan under subclause (I) (without regard to any net experience loss or gain otherwise determined for such year).

Notwithstanding the preceding sentence, a plan may elect to have this subparagraph apply to net experience losses for only 2 plan years beginning after June 30, 2002, and before July 1, 2006.

`(ii) RESTRICTIONS ON BENEFIT INCREASES- An amendment which increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan shall not take effect for any plan year in the hiatus period, unless--

`(I) the funded current liability percentage (as defined in subsection (l)(8)(B)) as of the end of the plan year is projected (taking into account the effect of the amendment) to be at least 75 percent,

`(II) the plan's actuary certifies that, due to an increase in contribution rates, the normal cost attributable to the benefit increase or other change is expected to be fully funded in the year following the year in which the increase or other change takes effect, and any increase in the plan's accrued liabilities attributable to the benefit increase or other change is expected to be fully funded by the end of the third plan year following the end of the last hiatus period of the plan, or

`(III) the plan amendment is otherwise described in subparagraph (A) or © of subsection (f)(2).

[MGB]

The language of the bill reads like the loss base in the year of the election (you can only do this twice) is delayed to not start its amortization until three years later.

However, that is not what the Congressional leaders think it says (and their opinion has been entered into the Congressional Record and will override the actual language).

It is much more broad. They think that ANY cost associated with losses in the year of election is delayed for three years. Example: Assume you had a net loss in 1994, you would still be amortizing it and that amortization amount is delayed for three years.

(Also note that it puts interest on the delays into the reconciliation account and they will never come back into the funding calculations...somebody needs to teach them that these things need to add up correctly.)

Note Kennedy's statement below. 2000 and 2001 are not within the period in the law, yet he is saying that any cost showing up as a result of those original losses would be eligible for relief.

Colloquy on Multiemployer Relief (this has been put into the Congressional record)

Sen. Baucus: This amendment provides short-term relief for multiemployer pension plans that are struggling to cope with unprecedented losses on their equity investments in the first few years of this decade. The temporary funding relief would help plans deal with the investment losses they suffered through 2002, by letting them postpone amortization of the portion of those losses that would otherwise be recognized for funding purposes in any two of the plan years beginning after June 30, 2002 and before July 1, 2006.

Sen. Gregg: That is correct. The proposed relief would permit a short-term postponement of the losses that count toward the required funding in any two of the plan years beginning after June 30, 2002 and before July 1, 2006. The relief may be taken for no more than two years.

Sen. Kennedy: Yes. For funding purposes, most multiemployer plans recognize investment losses gradually over a period of years. So, part of a plan's investment losses incurred in 2000, for example, would first be recognized under the funding rules in the 2001 plan year. The portion of those losses that show up in the funding requirements during the relief period would be eligible for the relief.

Sen. Grassley: As this discussion demonstrates, the focus of the relief is on the portion of the loss that would be recognized for any of the plan years for which the relief is available. That is what the language means when it refers to losses "for the plan year."

[Effen]

Great Stuff!

Thanks

[AndyH]

Those of us in the northeast know that clearly Senator Kennedy has been mis-quoted. There should be at least one "UH" or "AH" or "ARRHH" between each word.

[Guest RSNOW]

If there is no 417(e) relief in the bill do you (anyone) think 417(e) is not likely to be addressed, if at all, until Congress takes up permanent pension reform ? I guess I'm asking if there is anything else out there on the horizon that anyone knows about that might address the 417(e) issue sooner than later.

[mwyatt]

Andy, you listen to Howie Carr I presume?