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June 15, 2005

Towers Perrin Outlines Detailed Recommendations for Pension Funding Reform

Towers Perrin, a global professional services firm, today released further recommendations to reform the current regulatory and legislative framework for funding private employer-sponsored pension plans.

This latest set of recommendations comes as Congress considers important changes in U.S. pension law, including the reform proposal offered by the Bush administration earlier this year and Rep. John Boehner's Pension Protection Act introduced during the week of June 6th. Many pension plan sponsors have concerns about the potential costs associated with the Administration's reform proposal, as well as about more volatile contributions and higher Pension Benefit Guarantee Corporation (PBCG) premiums. Rep Boehner's bill represents a step forward from the Administration's proposal, but does not fully address all of the concerns plan sponsors have.

"Towers Perrin's proposal is designed to strike a balance between the need to improve pension plan funding levels and plan sponsors' need to keep costs and volatility within acceptable levels," said Steven Kerstein, Managing Director of the firm's HR Services retirement consulting practice. "These recommendations aim to preserve the nation's voluntary pension system by achieving a workable balance for all key stakeholders -- plan participants, company shareholders, government entities and plan sponsors. Workable funding reform legislation that all stakeholders can live with is critical to preserving a system that contributes to the lifetime financial security of millions of working Americans."

Key Recommendations

A team of Towers Perrin actuaries tested the firm's recommendations under a wide range of capital market scenarios and compared them with the Administration's proposal. The Towers Perrin proposals succeeded in substantially improving pension plan funded status while eliminating much of the additional contribution volatility that would be created by the administration's proposal. Specifically, Towers Perrin recommends:

-- Implementing a long-term funding target of 100% for all plan sponsors -- up from the 90% funding target under current rules.

-- Replacing the multiple liability measures under current rules with a single, market-based measure of plan solvency. Liability would be calculated based on the present value of benefits accrued, discounted using an interest rate based on high-quality corporate bond indexes published by established financial services firms.

-- Setting the minimum annual contribution requirement at the value of benefits earned during the current year plus a portion of any unfunded liability. Companies could also choose to fund in excess of minimum requirements.

-- Introducing new smoothing techniques and amortization requirements to help shield plan sponsors from dramatic swings in funding requirements caused by market volatility. Unlike current funding rules, these new smoothing techniques would be based on the market values of assets and liabilities described above to encourage plan sponsors to hedge against the risk of unfunded liabilities that can arise if there is a mismatch between assets and liabilities.

-- Basing PBGC premiums on the new solvency-based liability measure. Plans with funding levels below 70% could not improve benefits without contributing amounts that were at least equal to the value of the additional benefits being earned.

-- Encouraging plan sponsors to build up plan reserves by permitting tax-deductible contributions in amounts that would allow funding up to 130% of the solvency liability.

-- Allowing employers to use plan surpluses in excess of a certain threshold (e.g., 120% of solvency liability) for retiree heath care or other benefit purposes.

White Paper Provides Proposal Details and Analysis

More details about Towers Perrin's proposed legislative framework for pension funding, including an analysis of how the proposal would affect the funded status of a typical large company pension plan, can be found in a new Towers Perrin white paper (A Towers Perrin Proposal for Pension Funding Reform: Part II). This paper is the second in a series of three white papers the firm will publish in order to provide detailed recommendations on pension funding requirements, PBGC premiums and financial reporting requirements, and necessary steps for terminating plans, among other issues. The final paper in the series will be published in the coming months.

Posted by Tom Troceen