ACTION ALERT

February 27, 2004
AA 04–03

Urge Congress to Complete Pension Interest Rate Bill

Action Requested: At the Council’s February 26 meeting of the Washington Representatives, the Council hosted David Thompson, Chief Labor and Pensions Counsel for the Chairman of the Senate Health, Education Labor and Pensions Committee (HELP) and John O’Neill, the newly-minted Benefits Tax Counsel for the Chairman of the Senate Finance Committee. Their clear message was that the House Leadership and the potential conferees on the pension rate replacement legislation need to hear from the leaders in the business community that the replacement of the 30-year Treasury bond interest rate is very urgently needed.

Interest Rate Conference Tension. House Members are being told that there is no need to pass a replacement rate to the 30-year Treasury bond interest rate, and hence no need to move quickly with the conference on H.R. 3108. The argument being made is that the recovering stock market has removed the need for taking action to replace the 30-year Treasury bond interest rate. We need to counteract this rumor. Urge the House to appoint conferees and seek an agreement in the conference.

Appointment of Conferees. Although there has not been a consensus on the need for an immediate conference on the 30-year Treasury bond replacement rate legislation, the House of Representatives is still likely to appoint conferees shortly. Congressman John Boehner, Chairman of the House Committee on Education and the Workforce is expected to also be Chairman of the Conference Committee. The Senate appointed its conferees on February 21, 2004. They are: Senators Grassley, Gregg, McConnell, Baucus and Kennedy.

Contact Your Legislators. The Council continues to encourage legislators to enact a replacement rate for the now defunct 30-year Treasury bond interest rate. Communications with legislators in whose states or districts you have operations or workers is vital and should urge them to move forward.

Background: The House Bills. The House has passed two versions of interest rate relief: 1) H.R. 3108 the Pension Funding Equity Act; and 2) H.R. 3521, the tax extenders bill that included both interest rate replacement and limited deficit reduction contribution (DRC) relief for commercial airlines only.

Background: The Senate Bill. The Senate passed H.R. 3108 with interest rate relief, DRC relief for both commercial airlines and certain steel companies and upon approved request for other industries (approval is automatic if no response for 90 days), and temporary relief for multiemployer plans.

Materials: A table comparing the House and Senate bills is on the American Benefits Council’s website at: http://snipurl.com/billchart

Suggested Talking Points. The following talking points can be used when contacting Members and their staff.

• The Stock Market Recovery Is Not Enough. The recovery of the stock market is very welcome, but is has not erased the past three years of red ink. It would take a 100 percent increase in the market to make up for a 50 percent decrease in the value of plan assets.

• Asset Smoothing. In most instances, plan actuaries use a "smoothing" method in calculation to alleviate the volatility in required pension contributions. Even if there were a large and sustained increase in stock values, plans would recognize these gains only gradually and they would still be taking into account previously recognized losses.

• Four-Year Weighted Average of Interest Rates. Pension plans average four years worth of interest rates to calculate their contributions. Three years of very low interest rates would further lower the average. Contributions are stratospheric this year and will be as long as interest rates are low. They are even higher due to the artificially low 30-year Treasury bond rate.

• Higher Equity Values Must be Coupled with Rate Adjustment. Earnings on equities alone will not relieve the pressure on plans. Interest rates are a very big factor as well.

• IRS Needs Time to Issue Guidance After Legislation Is Enacted. IRS will need time to publish its guidance for plan sponsors to use in their calculations including how the corporate rate will be calculated as well as the actual rate.

• Plans Need Time To Make Calculations After the IRS Issues Guidance. Plans need time to calculate their contributions. Some actuaries provide calculations to hundreds of plans and will need time to calculate contributions for all the plans they handle before payments are due.

• Finish By Mid-March. The end of the quarter is March 31, 2004 and quarterly payments are due by April 15, 2004. Thus, mid-March is a "drop dead" date for passage. The effective date of any new legislation should be January 1, 2004 since the previous law expired December 31, 2003.

• A Balanced Conference Report Is Vital for Passage. A conference report that can pass both the Senate and the House is needed. The legislation might not be identical to either the House or Senate proposals. Both the Senate and the House should work toward the common goal of reporting out a conference report that is agreeable to both Houses of Congress.

For more information, please contact Diann Howland, Council vice president, retirement policy, or Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

###

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council’s members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.