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Letter to the Senate urging support for action on pension protection technical corrections legislation

November 18, 2008

Dear Senator:

On behalf of the National Education Association's (NEA) 3.2 million members, we urge the Senate to take immediate action on pending pension protection technical corrections legislation.

NEA regularly advocates for the strengthening of the employer-sponsored defined benefit pension plan system. That system is now in crisis as a result of the combined impact of the dramatic market downturn and the implementation of the new funding rules imposed by the Pension Protection Act of 2006 ("PPA"), which are now beginning to go into effect. The current financial crisis not only impacts workers today, but also will have severe, short-term negative effects on the pension plans in which they participate, reducing benefits, undermining retirement security, and, if prompt action is not taken, causing significant job loss and impairing the national economic recovery.

If Congress does not intercede, NEA anticipates that benefit accruals provided through numerous defined benefit plans will be frozen in the coming year. Further, the immediate funding burden in some cases is likely to be sufficiently great to cause layoffs of many sponsors' employees, and even the bankruptcy of the sponsor. Smaller the employers with mature workforces are likely to be the hardest hit. To avoid these results, it is necessary to delay or modify the new PPA rules that are preventing plan sponsors from appropriately addressing - over a reasonable period of time - the funding implications of the recent severe and ongoing plunge in the market value of plan assets. Specifically, we urge the Senate to:

Delay the effective date of the PPA funding rules . Although there are a number of transition rules, the PPA funding rules generally went into effect for plan years beginning after 2007. This means that for most plans the rules relating to the new funding obligations are just now starting to take effect. By delaying those rules by two years - generally to plan years beginning on or after 2009 and adding two years to each of the transition rule effective dates - plan sponsors would be able to continue to fund their plans using the more flexible pre-PPA rules. Those pre-PPA funding rules would allow plan actuaries to take into account the current higher corporate interest rates in measuring the value of the plan's pension obligations, and to reflect a longer-term actuarial value of the plan's assets rather than the current severely depressed market values.

Modify the PPA funding rules --

To permit flexible funding elections for the next two years . Under PPA, plans are required to adopt a consistent funding method from year to year. Thus, if the plan actuary measured liabilities based on a 24-month yield curve average, the plan would not be permitted to measure liabilities on a spot yield curve in 2009 to take advantage of the recent spike in interest rates, without IRS approval. To address the unprecedented market conditions that plans are facing, plan actuaries should be permitted to change funding methods without IRS approval for plan years beginning before 2011.

To permit assets to be smoothed without limitation for the next two years . Under PPA, asset smoothing is permitted over 24 months and is limited to 10 percent of the market value. Prior to PPA, assets could be smoothed over 48 months limited to 20 percent of the market value. The pre-PPA rules on smoothing should be extended for plan years beginning before 2011. Further, PPA should be clarified to ensure that asset "smoothing" is available in all circumstances rather than the asset averaging concept described in recent IRS guidance, which would systematically undervalue plan assets.

To apply the transition rules even if the phased-in funding target is not obtained in 2009 . To take advantage of the PPA transition rules, a plan must satisfy a phased-in funding level of 94 percent in 2009. Because the recent market upheavals will make it difficult for many plans to attain a 94 percent funding level, the transition rules should be available to plans even if they do not satisfy the phase-in funding level for 2009. Further, for future years, funding level targets should be measured based on the previous year-end asset values.

To extend amortization of losses incurred in 2008 . Under PPA, losses may be amortized only over seven years. Losses incurred during 2008 should be permitted to be amortized over 10 years. Further, employer contributions designed to offset 2008 plan losses, which would otherwise cause benefits to be restricted under PPA rules, should be permitted to be taken into account for minimum funding purposes.

We also urge the Senate to make a needed technical correction to the PPA to ensure restrictions aimed at issues in the ERISA plan setting do not impose benefit cuts on employees in governmental defined benefit plans. Specifically, we strongly support a needed statutory clarification to ensure rates of interest established by or in accordance with State or local laws are treated as permissible methods of crediting interest.

At issue is a requirement in the PPA stipulating that in order to comply with age discrimination laws the rate of interest used by a defined benefit plan can be no greater than a "market rate of return."  This cap is aimed at issues that arise under ERISA. In the public plan setting - where benefit protections and plan designs are quite different - the application of an interest rate cap would cut employee benefits, may actually conflict with State and local benefit guarantees, and also undermine efforts to preserve underlying defined benefit features.

Most governmental pension plans credit interest in some fashion, whether on refunds of contributions, deferred retirement option plans (DROPs), survivor benefits, or other optional forms of benefit common in public sector plans. These plan features are set through public law to achieve different objectives. In some cases, the structure was designed to protect public plan participants from the ravages of inflation or downside investment risk, in others to allow members to share in the investment gains of the plan. Many apply solely to optional ancillary provisions added to provide flexibility or accommodate the needs of short-service employees while safeguarding the traditional pension as the primary plan benefit. Nevertheless, State statutes and/or local ordinances guaranteeing numerous types of interest credit, including set, underlying or minimum rates of return, could be in excess of a new federal limitation in any particular year.

Finally, we urge the Senate to protect multiemployer pension plans from insupportable contribution increases that could lead to the loss of covered jobs and devastating cuts in workers' pensions Specifically, we support amending ERISA and the Internal Revenue Code, as amended by the PPA to

  • Give each multiemployer pension plan the option to elect to "freeze" its current funding zone certification status (including funding improvement plans and rehabilitation plans) through the end of the 2011 plan year;
  • Provide for limited recognition of current market losses (and future market gains) in plan status determinations by amending the technical rules to require actuaries to base the projections on the actuarial value of assets as used for plan funding and temporarily expand the IRS- mandated restriction on the extent to which the smoothed actuarial value of assets can deviate from market values; and
  • Add 5 years to the correction period - the Funding Improvement or Rehabilitation Period for a multiemployer plan that is in Critical or Endangered Status (Red or Yellow Zone), and provide that each such plan that has a pre-PPA amortization extension is deemed to meet any requirement of that extension that is based in whole or part on the value of plan assets.

These changes are essential to help employers deal with the extraordinary crisis in investment markets.

Thank you for your immediate attention to these urgent matters.


Diane Shust, Director of Government Relations

Randall Moody, Manager of Federal Advocacy