Three on Pensions

1)	Congress weakens pensions

2)	Congress passes pension changes in highway package

3)	New rules may make public pensions appear weaker 



1)	Congress weakens pensions

By Jennie L. Phipps

Bankrate.com

Thursday, July 5, 2012 Posted: 4 pm ET

http://www.bankrate.com/financing/retirement/congress-weakens-pensions/

Last Friday, in advance of the July Fourth holiday week
-- when almost no one was paying attention -- Congress
passed a law that affects old-fashioned defined benefit
pensions and the government entity charged with shoring
them up -- the Pension Benefit Guaranty Corp., or PBGC.

The law, which was linked to highway funding
legislation, tinkers with the amount of money
businesses have to keep on hand to fund their pension
obligations.

Here's how the deal works:

Currently, businesses that have an obligation to pay
pensions to past and current employees are required by
law to calculate how much money they must keep on hand
based on current interest rates, which are tied to
long-term, high-quality corporate bond rates. Because
bond rates are so low, companies must earmark a lot
more money than they did when bond rates were higher.

Companies were unhappy with that, and they lobbied
Congress to change the way their pension obligations
were  calculated, so they wouldn't have to set aside as
much. Congress listened and agreed that instead of
using current bond rates, under this new legislation,
companies can base their pension obligations on an
average of bond rates over the last 25 years, reducing
their obligations by about 2.5 percentage points.

This easier standard has an advantage for Congress,
which has not been able to bring itself to pay for
highway construction the obvious way, which is to raise
the gas tax. Under the bond-rate scheme, Congress
believes companies will have to report higher profits
to the Internal Revenue Service and pay higher
corporate income taxes -- $9.4 billion over 10 years,
Congress has calculated. That is enough to not only pay
for highway construction, but also to freeze the
student loan rate for another year -- a second problem
that Congress has been unable to resolve easily.

The losers in all of this are clearly retirees and
people close to retirement who are counting on defined
benefit pensions.

Congress did do something to offset this cutback in
required funding levels -- it raised the amount of the
premium that companies must pay to the PBGC to insure
that they'll be able to meet their pension obligations.
PBGC flat-rate premiums will increase from $35 to $42
per participant in 2013 and go to $49 in 2014. After
that, they will be indexed for inflation. That's
something, but it doesn't compensate for the fact that
the PBGC is already $9.4 billion in the hole.

Meanwhile, Mercer management consulting estimates that
this deal will save corporations that are part of
Standard & Poor's 1500 composite index some $40 to $50
billion in 2012, and the savings could total well over
$100 billion through 2014.

If you're counting on getting a defined benefit
pension, you'd better consider this maneuver in your
retirement planning -- and when you go to the polls in
November.

Read more: Congress weakens pensions | Bankrate.com
http://www.bankrate.com/financing/retirement/congress-
weakens-pensions/#ixzz1ztSiTFtk



2)	Congress passes pension changes in highway package

By: Hazel Bradford

Published: June 29, 2012

Peansions and Investments Online

http://www.pionline.com/article/20120629/reg/120629855


The House and Senate on Friday passed legislation to
give corporate pension plans some funding relief while
also raising their premiums to the PBGC.

The changes were approved as part of a highway
reauthorization bill, which also extends a student loan
subsidy, and was approved in the House by a vote of 373
to 52 and in the Senate by a 74-19 vote.

The bill now goes to President Barack Obama, who is
expected to sign it.

Instead of using the current method of calculating
pension liabilities with two-year corporate bond
interest rates, plan executives can now use a 25-year
average corporate rate that is within a 10% range. That
range will grow 5% per year, which will reduce the
amount of relief available to sponsors each year. The
new formula would raise the interest rates used to
calculate liabilities to 6.7% from the current
effective rate of 5.3%.

That new calculation formula is expected to immediately
raise the funding levels of corporate defined benefit
plans, with the Society of Actuaries estimating that
the number of large corporate plans over 80% funded
will rise to 91% from the current 62%, but the
legislation also calls for disclosure of current
calculations and funding levels, in addition to new
formulas, adding to the potential for confusion,
pension experts say.

The increased federal tax revenue that would come from
reduced tax-exempt pension contributions made the
changes politically acceptable to both Democrats and
Republicans, along with another provision allowing for
higher PBGC premiums. The bill calls for increasing
flat-rate premiums to $42 per participant next year
from $35, and then further hikes in later years.
Variable-rate premiums, which would still be calculated
by current interest rates, would also increase by a
formula based on a plan's funding level.

The PBGC premium increases made it a mixed victory for
pension plan executives. "While we strongly support
pension stabilization, we do not believe that Congress
should be including an increase in PBGC premiums as a
trade-off," said Scott Macey, president and CEO of the
ERISA Industry Committee, in a news release.

Original Story Link:
http://www.pionline.com/article/20120629/reg/120629855




3)	New rules may make public pensions appear weaker 

Mon, Jun 25 2012

By Lisa Lambert and Nanette Byrnes

http://www.reuters.com/article/2012/06/25/us-usa-pensions-standards-idUSBRE85O01Z20120625

WASHINGTON (Reuters) - New accounting rules approved on
Monday are likely to show public pension funds are in a
weaker financial position than previously thought and
intensify disputes over how public retirement systems
are funded.

The Governmental Accounting Standards Board, which sets
the accounting standards for the public sector,
finalized a single system of accounting to replace the
menu of financial reporting options public pension
funds currently use.

State and local governments will have to post their net
pension liability - the difference between the
projected benefit payments and the assets set aside to
cover those payments - up front on financial
statements, under the changes.

"The pension liability will appear on the face of the
financial statements for the first time. That's going
to create the appearance of a weaker financial
position," said Robert H. Attmore, GASB chairman, who
said the board intended to "peel back the veil so
things are more transparent and there's more
information for policy makers."

Governments participating in multi-employer plans -
essentially smaller cities that are part of the state
systems - will have to represent their share of
liabilities, which could also make them appear
financially weaker. Currently, they only have to state
how much they have contributed.

Richard Ciccarone, managing director and chief research
officer at McDonnell Investment Management, said GASB
was headed in the right direction in terms of
comparability and transparency, adding that some of the
changes will sharply increase deficits for some
governments.

"It shouldn't immediately cause anyone to file for
bankruptcy," he said, adding that "it may immediately
raise the level of attention to seriously do something
here."

The biggest GASB change affects how the pension funds
project rates of return on their investments, which
provide 60 percent of their revenue. Underfunded
pensions would have to lower their estimates for
returns.

GASB also eliminated a process known as "smoothing,"
where the pension systems spread the liabilities over
time, making the funds more reactive to volatility in
financial markets. Funds can still spread out expenses,
but over a shorter time frame.

Some of the GASB changes go into effect on June 2013,
with the others implemented in June 2014.

More changes are coming. Starting next month, GASB will
begin work on accounting for other retiree benefits,
mainly healthcare, which tend to be in worse shape than
pensions.

Some critics say the reforms could distort perceptions
of governments' and retirement systems' health. They
worry politicians will seize on the new, larger
liabilities, to push through policy changes or starve
employee retirement systems.

"We're concerned about confusion of the numbers," said
Keith Brainard, research director of the National
Association of State Retirement Administrators. "If a
plan has a liability of $4 billion, does that mean they
need $4 billion today? No. It's an accounting number."

Governments typically provide about 20 percent of
pension fund revenue, but under the new standards, they
will not have to disclose their annually required
contributions (ARC). Ciccarone, however, raised
concerns that governments would no longer post this
information.

The Government Accountability Office, the nonpartisan
federal auditor, reported in March that "most state and
local government plans currently have assets sufficient
to cover their benefit commitment for a decade or
more."

Still, skepticism has risen about both the long and
short-term prospects of public pensions. A week ago the
Pew Center on the States estimated states are short
$757 billion to pay retiree pension benefits, and the
total could grow.

LOWER RATES OF RETURN MEAN BIGGER TAXPAYER BILL

Although it sounds like a technical accounting move,
the new standard on rates of return is key to the
pension wars.

Pension funds that are considered adequately funded
could continue forecasting investment returns in-line
with their historic averages, usually around 8 percent,
under the new GASB rules. The board would only define
those pension systems as having sufficient assets on
hand to pay the pension of current employees and
retirees, but did not set a funding ratio.

Funds lacking sufficient cash to cover benefits must
lower their projected investment rate to about 3
percent to 4 percent. Specifically, the investment rate
would have to match "a yield or index rate on
tax-exempt 20-year, AA-or-higher rated municipal
bonds," an information sheet on the changes said. On
Monday, the yield for AA-rated municipal bonds due in
20 years was 3.12 percent, according to Municipal
Market Data.

When investments fail to meet the forecasts,
governments - essentially taxpayers - and employees
must pitch in money to fill the void. At the depth of
the recession in 2008, the return on pension
investments fell by 25 percent, Pew found.

The new rules offer a compromise. U.S. Congress would
like systems to use a rate they call "riskless," about
4 percent. Pensions counter they should use historical
averages.

Pew found that Wisconsin is the best-funded retirement
system in the country, and Illinois the worst.

"States like New York, which are making their
contributions to their pension plans and are
well-funded, their liability should not be affected by
the new discount rates," said David Draine, senior
researcher at Pew, about the GASB changes. "States like
Illinois that are having trouble making their
contributions, you would expect to be more affected."

According to a study by the Center for Retirement
Research at Boston College, the funding ratio which is
at 76 percent in 2010 could decline to 57 percent with
the new accounting rules.

In some cases the reductions expected in the funding
ratios are massive. Illinois teachers, a notoriously
underfunded pension fund, currently has a funding ratio
of 48.4 percent. Under the GASB's proposed changes it
may fall to as low as 18.8 percent.

Pew also found states are short $627 billion for other
retiree benefits, and 17 states have set aside no funds
for them. According to Pew, states currently have only
5 percent of what they need for these "Other
Post-Employment Benefits."

Until 2006, GASB did not have any accounting standards
for those benefits.

(Reporting by Lisa Lambert in Washington and Nanette
Byrnes in Chapel Hill; Editing by Anthony Boadle and
M.D. Golan)

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