House Approves Smoothing Technique in Pension Bill

By Staff Report

Jul. 9, 2008

Employers will be able to take into account expected future growth of their pension plan investments when calculating current contributions under a bill unanimously approved by the House of Representatives on Wednesday, July 9.

The measure makes technical corrections to the Pension Protection Act, which was signed into law in 2006 and went into effect in January of this year. Most of the changes to the original bill are minor.

The corrections measure passed by a voice vote. It will now have to be reconciled with a similar but not identical Senate bill. Supporters hope the Senate will vote on the House version to speed the process.

Some resistance cropped up in the House over clarifying that plan sponsors can use an actuarial technique known as smoothing to determine liability. At least one member indicated that such a change to the underlying pension law would be substantive rather than technical.

The 2006 law limits smoothing to 24 months instead of the four years previously allowed. The Bush administration was concerned that smoothing, which it wanted to eliminate altogether, had led companies to sharply undervalue their pension liabilities and stumble into huge defaults.

Treasury Department regulations implementing the pension law would repeal asset smoothing and force companies to average assets over two years, a practice that critics contend undervalues pension plans and could force companies to suspend lump-sum payments or accruals.

Business advocates had been quietly but firmly pushing the House to validate smoothing in the corrections bill. Experts say the practice sharply reduces pension volatility, giving companies breathing room to make sound funding decisions.

“It’s good for the pension system,” said Ethan Kra, a worldwide partner and chief actuary-retirement at Mercer in New York. “It removes an incentive for employers to exit the defined benefit system. Smoothing allows companies to budget cash flows more rationally.”

Pension costs avoided through smoothing can vary widely but often are significant, according to Kyle Brown, retirement counsel at Watson Wyatt in Arlington, Virginia.

“For a lot of companies, this can be a big-ticket item,” Brown said.

Rep. Earl Pomeroy, D-North Dakota and a leading proponent of the corrections bill, asserts that the overall economy will benefit if employers can more finely calibrate their pension contributions through smoothing.

“In these times of economic uncertainty, this will prevent employers from being forced to divert millions more to their pensions that could otherwise be invested in their workers and help them weather these difficult economic times,” he said in a statement after the vote.

During floor debate, Pomeroy praised the bipartisan action on the bill. “This sets the stage for further collaboration” on pension issues, he said.

For now, there’s no crisis spurring further congressional action. Despite current economic stress, pension funds are holding up.

“Plans are in better shape than they were several years ago,” Brown said.

—Mark Schoeff

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