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Statement to Congress on Defined Benefit Pension Plan Funding Levels

October 01, 2009

Submitted by NEA to the Committee on Ways And Means, U.S. House of Representatives

The National Education Association (NEA) respectfully submits these comments to the Committee on Ways and Means for the record in conjunction with the October 1, 2009 hearing on defined benefit pension plan funding levels and investment advice rules. 

NEA strongly supports legislation being drafted by Representative Pomeroy that will provide the funding relief desperately needed by sponsors of defined benefit pension plans in the private sector.  The bill is appropriately calibrated to help plan sponsors recover from the cataclysmic market losses that occurred during the five-month period stretching from the summer of 2008 through the winter of 2009, when the assets of defined benefit pension plans suffered an average market value loss of 40 percent.  Without the short-term, targeted funding relief provided by the Pomeroy draft, many employers will not be able to continue in business, let alone maintain their pension plans.  Accordingly, NEA commends Representative Pomeroy for sponsoring this bill and urges the House Ways and Means Committee to move the bill to the House floor intact and to send with it an urgent message about the need for speedy passage of the bill in both the House and Senate.

NEA is a leading advocate for financially stable, employment-based, defined benefit pension plans in both the public and private sectors of the economy.  Although nearly all of NEA’s members are employed by public school employers not subject to the funding rules governing private sector defined benefit pension plans (and therefore would not be affected by the funding relief provided by the Pomeroy bill), NEA understands that passage of the legislation is vitally important to the survival of employment-based defined benefit pension plans in all sectors of the economy.  Without funding relief, the relatively inflexible funding rules imposed on sponsors of private sector defined benefit plans would make sustaining those plans, given the stresses of the once-in-every-other-generation market upheaval of the end of last year and the beginning of this one, nearly impossible for many employers.  For those employers, the cost of sustaining their defined benefit pension plans under the funding rules without relief will force them to retrench their operations severely, causing losses in economic activity and jobs in their core businesses.  And, as private sector defined benefit pension plans become rarer, the defined benefit pension plans maintained for our members will inevitably become harder for public sector employers to sustain.  

NEA’s knowledge about the severe challenges that private sector employers are facing in maintaining their defined benefit pension plans has been gained first hand through the experience of its own affiliated associations throughout the country, nearly all of whom maintain defined benefit pension plans – on both a single employer and multiemployer basis – for their own employees.  For the most part, NEA’s affiliates are financially stable, mature organizations with predictable cash flow.  These organizations take pride in providing retirement security for their staff employees by maintaining well-funded defined benefit pension plans.  Yet, the application of the new stringent funding rules of the Pension Protection Act (“PPA”) – which generally increase the unpredictability of funding requirements year-to-year – to plans that have suffered, over a five-month period, a drastic and unpredictable market drop in the value of their funding, has suddenly made sustaining those plans a nearly unbearable burden. 

And it is not just the plans that are jeopardized by this funding crisis:  many of NEA’s affiliated associations are being forced to postpone, curtail, or eliminate regular services, staffing, and capital improvements, often on top of increases in member dues.  This is because, absent relief, in 2009 the average NEA affiliate will be faced with the immediate obligation to make funding contributions equal to 37 percent of its payroll, just to maintain its defined benefit pension plan.  This huge funding obligation is not the result of past irresponsible funding behavior; on the contrary, these organizations have been uniformly fiscally responsible sponsors of their defined benefit plans, and many have been making markedly increased contributions to their plans over the last few years.  Not one of these associations has taken contribution holidays or paid only the minimum contribution required by existing funding rules.  Financially sound, long-term membership organizations such as these – like many other businesses in the private sector – should be financially able to maintain defined benefit pension plans.  But, unless these employers are given some temporary flexibility in how to recoup the severe investment losses of the last two years suffered by their plans, many of these plans will not be sustained, and the organizations will be substantially damaged financially as well.

Representative Pomeroy’s proposal will have a major beneficial impact by providing sponsors the opportunity to fund the investment losses that their defined benefit plans incurred at the end of 2008 and the beginning of 2009 over a longer period of time.  This one temporary change in the funding rules will permit many defined benefit pension plans to remain viable; and it will free up needed investment capital for the sponsors’ core businesses and allow these employers to begin hiring again.  The Pomeroy proposal provides this temporary relief in the form of two alternative funding rules, either of which sponsors may elect voluntarily to comply:  (1) an option to defer for two years the amortization of the shortfalls occurring in 2009 and 2010; or (2) an option to amortize the shortfalls occurring for the first time in 2009 and 2010 separately over a 15-year period.  NEA is most pleased by the inclusion of the latter alternative in the bill, because it will provide greater relief for sponsors’ contribution obligations in the earlier years.  NEA is similarly pleased with the bill’s temporary funding relief for multiemployer plans, which employers would be permitted to elect voluntarily during 2009 or 2010 either:  (1) to restart the amortization of unfunded liabilities over a 30-year period; or (2) to establish a separate amortization base for investment losses recognized from the fall of 2008 through the fall of 2010 and to fund this liability over a 30-year period.

The bill’s “maintenance of effort” requirements, which are linked to its temporary funding relief provisions for single employer plans, are appropriately calibrated to incentivize sponsors to continue to provide benefits to plan participants during the same period in which they are receiving relief.  As no plan sponsor is required to accept the temporary funding relief, and the bill provides different methods of complying with the maintenance of effort requirements, the temporary limitation on the sponsors’ flexibility to curtail plan benefits or to enhance executive nonqualified plan benefits is both justified and fair. 

The genius of the bill is that it provides temporary funding relief without undoing the principles of the Pension Protection Act, which were designed to ensure that defined benefit pension plans were better funded.  Under the bill, no employer would be allowed to make contributions for 2009 and 2010 that are less than those made for prior years.  And no liabilities will be hidden; that is, the accounting statements made on behalf of the plan will fully reflect the value of the liabilities and the longer time period during which sponsors will fund them. 

Further, the changes that the bill does make to the PPA will help sponsors maintain better funded defined benefit pension plans.  All of the temporary and permanent changes to the PPA are well-designed to make plan funding more predictable and affordable, making it much more likely that sponsors will be able to maintain their defined benefit pension plans in the long run.  By doing so, the bill improves the financial outlook of the plan sponsors and the Pension Benefit Guaranty Corporation. 

For all of these reasons, NEA fully supports the Pomeroy proposal and intends to advocate vigorously for the bill’s enactment.  We urge the members of the Ways and Means Committee to pass it expeditiously. 

Thank you for the opportunity to submit these comments.