ACTION ALERT

November 18, 2008

Urge legislators to enact pension funding legislation

Action Requested: Please contact your local representatives, congressional leadership, chairmen of the tax and labor committees and/or any other lawmakers with whom you have a relationship to urge their support for critical pension funding legislation this year.

Background: The current economic turmoil and market instability are creating enormous volatility in defined benefit pension plan asset values. In accordance with the aggressive funding rules in the Pension Protection Act of 2006 (PPA), plans with dramatically undervalued assets will be forced to direct significant resources toward their funding obligations. These are resources that could otherwise be used for job creation, infrastructure and other capital investment that would contribute to economic recovery.

Members of U.S. Senate and House of Representatives are hearing the company concerns regarding these funding obligations and the negative impact on their ability to recover economically. However, lawmakers are reluctant to take action that would appear to re-open or unravel the PPA or include proposals that have not already been considered through technical corrections or as part of other legislation. The current expectation is that the four key Committees (see below) could agree to offer a narrow proposal that is targeted to asset smoothing (without changes to the 110% corridor) and the transition rule “cliff” that would address the calculation of the shortfall for companies that fall below the phased-in funding threshold. It is possible that the rule limiting the use of smoothing to no greater than 110% of the fair market value of the assets could be widened but probably not without losing the fix to the transition cliff.

Reports from actuaries indicate that more companies would be helped by the broadening of the corridor. The proposal is likely to include a targeted provision permitting an election to temporarily freeze the status of an endangered or critical multiemployer plan at the same status held in the immediately preceding plan year. The funding proposal would likely be considered without debate and vote (unanimous consent) before Congress leaves at the end of the week. It is possible that a bill that includes additional proposals could be introduced before Congress leaves that will set the stage for further action early in 2009.

The U.S. Senate has returned for a “lame duck” legislative session, and the House of Representatives will convene on Wednesday, November 19. During this brief session, lawmakers may consider a broad economic stimulus bill, automotive industry legislation, and/or an unemployment insurance measure. The Council is pushing for the inclusion of important defined benefit pension plan funding relief with these measures, or as free-standing legislation since prospects for action on these broader bills is uncertain.

• Permit pension plans to smooth out unexpected asset losses. In the PPA, Congress permitted pension plans to recognize unexpected asset gains and losses over 24 months. Treasury misinterpreted Congress’ intent and has effectively applied a mark-to-market rule to pension plans, which will cause unmanageable burdens for companies in 2009 (with many plan losses of approximately 20% to 30% in 2008). Congress should clarify that plans can use “smoothing” to recognize unexpected asset gains and losses over 24 months.
• Permit full asset smoothing. The Pension Protection Act (PPA) only allowed unexpected gains and losses to be smoothed out to a very limited extent, so that the smoothed value must stay within 10% of fair market value. For 2009 and 2010, smoothing should be permitted without a percentage limitation. This maximizes the value of smoothing and predictability.
• Transition to the new funding rules. The “funding target” for all pension plans in 2009 should be allowed to remain at 92% funded (the current 2008 phase-in level), and plans at and below the target should be eligible for transition relief.
• Permit all new funding elections for 2009 or 2010. Although funding methods, such as which type of yield curve to use, generally must remain constant absent IRS approval, funding methods should be allowed to be changed for 2009 and 2010 without IRS approval.

Resources: These measures are described in greater detail in a number of documents prepared by the Council.

• NEW! Council Talking Points on Defined Benefit Plan Funding Relief

• Defined Benefit Plan Funding: The Effect on Plans, Plan Participants and Jobs provides specific examples of the funding rules’ impact on certain plans.

• The Need for Funding Legislation: Questions and Answers addresses some of the frequently asked questions about the necessary relief.

• The November 12 group letter to Congress urges immediate action on pension funding.

PLEASE HELP: We ask you to make immediate calls to the key groups listed below and specifically explain the connection between the funding obligation and the decisions your company is facing. House minority leadership is particularly important since the Pension Protection Act was negotiated during the 109th Congress when the Republicans were in the majority. Please urge lawmakers to take action on broadening the corridor and the interest rate election now. Smoothing and fixing the transition cliff are very important but do not fully address the challenges caused by the recent financial turmoil. More needs to be done to provide both retirement security for millions of Americans and promote economic recovery.

Please help: Key contacts and resources are provided below. For more information or assistance, contact Lynn Dudley, senior vice president, policy, at (202) 289-6700.

Congressional directory and House/Senate leadership
http://capwiz.com/appwp/directory/congdir.tt

House Ways and Means Committee
http://capwiz.com/appwp/directory/committees.tt?commid=hways

House Education and Labor Committee
http://capwiz.com/appwp/directory/committees.tt?commid=hecon

Senate Health, Education, Labor and Pensions (HELP) Committee
http://capwiz.com/appwp/directory/committees.tt?commid=slabo

Senate Finance Committee
http://capwiz.com/appwp/directory/committees.tt?commid=sfina