[Senate Report 108-221]
[From the U.S. Government Publishing Office]
Calendar No. 425
108th Congress Report
SENATE
2d Session 108-221
======================================================================
PENSION STABILITY ACT
_______
January 9, 2004.--Ordered to be printed
Filed, under authority of the order of the Senate of December 9, 2003
_______
Mr. Gregg, from the Committee on Health, Education, Labor, and
Pensions, submitted the following
R E P O R T
[To accompany S. 2005]
The Committee on Health, Education, Labor, and Pensions,
reported an original bill (S. 2005) to temporarily replace the
use by pension plans of the 30-year treasury bond rate with a
composite corporate rate, and to establish a commission on
defined benefit plans, having considered the same, reports
favorably thereon without amendment and recommends that the
bill do pass.
CONTENTS
Page
I. Purpose and summary of the legislation...........................1
II. Background and need for legislation..............................2
III. Legislative history and vote in committee........................2
IV. Explanation of bill and committee views..........................2
V. Cost estimate....................................................5
VI. Application of law to the legislative branch.....................9
VII. Regulatory impact statement......................................9
VIII.Section-by-section analysis......................................9
IX. Changes in existing law.........................................10
I. Purpose and Summary of the Legislation
The purpose of this legislation is to provide a temporary
replacement for the 30-year Treasury bond for determining
funding liabilities of private sector pension plans, and to
establish a blue-ribbon bipartisan commission to make
recommendations for comprehensive pension reforms. The bill
ensures that comprehensive reforms to the defined benefit
system will be enacted by Congress prior to the end of the 3-
year period by requiring Congress to act upon the commission's
recommendations within 120 days of their receipt.
II. Background and Need for Legislation
Current funding and payout calculations for the defined
benefit plans in the private sector are based on the 30-year
Treasury bond that is no longer being issued. The low interest
rate of this bond in recent years means employers must put more
cash in their plans to satisfy full funding requirements. The
poor performance of the stock market and recent economic
downturn compound the problem, resulting in cash-starved
companies having to divert capital away from development to
fund their pension obligations.
The current liability funding rules require the sponsor to
use a specified mortality table and to calculate liabilities
using an interest rate that is within a range of rates based
upon the four-year weighted average of 30-year Treasury bonds.
As amended in 1994, the permissible range is no lower than 90
percent of the 30-year bond average and no higher than 105
percent of the 30-year bond average. In March 2002, Congress
enacted the Job Creation and Worker Assistance Act of 2002,
Public Law 107-147, which created temporary funding relief for
2002 and 2003 only. A plan may use an interest rate of up to
120 percent of the 30-year bond average. Congress enacted this
short term higher range in recognition of the fact that, as a
result of the rise of budget surpluses followed by the decision
of the Treasury to cease issuing 30-year bonds, the 30-year
bond rate had dropped to levels that produced inflated
calculations of pension liability.
This higher statement of liabilities can require the
diversion of hundreds of millions of dollars in a single
company. Overstating liabilities is causing some employers to
freeze, modify, or abandon their defined benefit plans, thus
adversely impacting retirement security.
The relief granted in JCWAA is set to expire at the end of
2003 and the permissible range will revert to 105 percent of
the 30-year Treasury bond rate. The low 30-year Treasury bond
rate of recent years means that this reversion will cause many
companies to divert cash from capital development, job growth,
and critical employee benefits like health care insurance, to
pension contributions, or to freeze or terminate their defined
benefit plans.
III. Legislative History and Vote in Committee
The Pension Stability Act was set before the committee as
an original bill on October 15, 2003, and considered in
executive session on October 29, 2003. A substitute, offered by
Chairman Gregg, was agreed to without objection and the bill
was approved by voice vote by the committee.
IV. Explanation of Bill and Committee Views
The Pension Stability Act provides a responsible, immediate
solution to the pension funding crisis facing the economy,
while developing the glide path toward permanent defined
benefit system funding improvements. It accomplishes these
goals through three key components.
REPLACEMENT RATE
The bill temporarily replaces the interest rate used for
plan years beginning after December 31, 2003, and before
January 1, 2007, in determining current liability for funding
and deduction purposes and in determining PBGC variable rate
premiums. For these purposes, the provision replaces the
interest rate on 30-year Treasury securities with the rate of
interest on amounts conservatively invested in long-term
corporate bonds.
For purposes of determining a plan's current liability for
the relevant years of this temporary fix, the interest rate
must be within a permissible range of the weighted average of
the rates of interest on amounts conservatively invested in
long-term, corporate bonds during the 4-year period ending on
the last day before the plan year begins. The rate shall be
determined by the Secretary of Labor, in consultation with the
Secretary of the Treasury, through regulations on the basis of
two or more indices of corporate bonds that are in the top two
quality levels available reflecting average maturities of 20
years or more. Such indices shall be publicly available,
published by established financial services firms, and based on
publicly disclosedmethodologies. The single interest rate
prescribed by the Secretary's regulation shall be based on the
arithmetic average of such indices.
The permissible range for these years is from 90 percent to
100 percent. The Secretary of Labor is directed to publish the
interest rate within the permissible range.
In determining the amount of unfunded vested benefits for
PBGC variable rate premium purposes for plan years beginning
after December 31, 2003, and before January 1, 2007, the
interest rate used is the annual yield on amounts invested in
long-term corporate bonds for the month preceding the month in
which the plan year begins, as determined by the Secretary of
Labor, in consultation with the Secretary of the Treasury, on
the basis of two or more indices of corporate bonds that are in
the top two quality levels available reflecting average
maturities of 20 years or more, selected periodically by the
Secretary. The Secretary of Labor is directed to publish such
annual yield.
The Secretary of Labor, in consultation with the Secretary
of the Treasury, is authorized to issue rules to implement the
use of the rate of interest on amounts invested in conservative
corporate bonds for purposes of the lookback rules. The
committee is aware that making calculations of current
liability for prior years can be difficult in cases where
administrators have changed or where records are otherwise
unavailable. Such rules may include simplifying assumptions for
determining a plan's current liability for years prior to the
effective date.
The committee anticipates that IRS Notice 90-11 will remain
in effect throughout the duration of this legislation. That
Notice clarifies that any interest rate within the corridor
prescribed in ERISA and the Internal Revenue Code is deemed to
be consistent with the assumptions that reflect the purchase
rates that would be used by insurance companies to satisfy the
liabilities under a plan upon plan termination.
By adopting the composite corporate rate for this temporary
relief, the committee does not close the debate on what
interest rate benchmark is the most appropriate for the long-
term stability of the defined benefit system.
DURATION
The Pension Stability Act replaces the 30-year Treasury
bond rate with the composite corporate bond rate based on
conservative indices for a period of 3 years. This period of
time is considered critical to ensure the stability of the
pension system, and is the most appropriate duration for
setting the stage for permanent and comprehensive reforms.
In the view of the committee members, a shorter term
solution, such as the current 2-year fix adopted in 2002, would
only exacerbate the uncertainty that businesses and unions face
in planning for the future.
It is clear to most observers that 2 years will not be
enough time to consider and enact the comprehensive reforms
that are needed by the defined benefit system. Already,
companies are departing from the system at an alarming rate. In
1983, there were more than 175,000 traditional defined benefit
pension plans in the United States. This number has declined
ever since and now stands at fewer than 35,000. Further
piecemeal reforms will only increase the confusion and continue
the decline in defined benefit plans. There is a consensus in
Congress that all of the interrelated issues must be
reconsidered and revised. These include the benchmarks for
determining funding levels and liabilities, mortality tables,
and many more issues.
Already there are several new components of reform on the
table that must be considered. For example, the Bush
Administration has proposed a yield curve approach for
determining plan liabilities. This is a novel approach that is
not fully understood and its effects have not been fully
analyzed. Its impact on companies with older workforces could
be very severe. How a new funding regime will impact markets
and what effect new accounting rules will have are perhaps even
more problematic. Simply put, it will take more than 2 years to
build the policy and political consensus for the broad range of
reforms that are needed.
Permanent changes to the pension system will require
bipartisan cooperation and thorough, time-consuming analysis of
innovative proposals. The Pension Stability Act takes into
account these needs for a longer time period to resolve these
complex issues by adopting a 3-year period for a temporary
solution.
The temporary interest rate relief adopted by JCWAA was
intended to provide Congress with time to devise a permanent
solution. However, Congress has not acted to do so; nor has the
administration come forward with comprehensive reform
proposals. The committee is concerned that another 2 years of
funding relief will lead to yet another 2-year extension in
2005. While this may be convenient from a financial policy
perspective, the impact on pension plans and employee benefits
policy could be devastating. Companies are already fleeing from
the defined benefit system because of cost, complexity and
changing demographics. Adding uncertainty--as will be the case
with periodic extenders--will only hasten the conversion to
other benefits or no benefits programs.
Finally, 3 years of temporary relief takes into account the
realities of business planning cycles. Companies must meet
long-term business planning goals--in order to obtain financing
and to plan for future costs, they need as much information as
early as possible about future pension funding obligations.
Additionally, the timing of pension reforms will have a direct
impact on labor relations because most collective bargaining
agreements are at least 3 years in length. Three years of
pension funding relief mirrors the terms of these agreements
and provides greater certainty for employers and employees at
the bargaining table.
BI-PARTISAN BLUE RIBBON COMMISSION
The Pension Stability Act creates a Defined Benefit Plans
Commission to review all outstanding issues, including all of
the issues that the Bush Administration has put on the table,
and report to Congress at the end of 2005. Members of the
Commission, appointed by the President and chairmen and ranking
members of the relevant committees in the Senate and House of
Representatives, will be drawn from government, business,
labor, and pension rights groups. The Blue Ribbon Commission
demonstrates a clear commitment to responsible,comprehensive
reform of the defined benefit system. Everything will be on the table
at the Commission; all interested parties are expected to participate
or be left out the solution.
This commission is needed because too much money is at
stake and the livelihood and security of too many Americans are
at risk for these issues to be left purely to the political
process. More importantly, however, is the view that these
issues are too important, and the dollar figures too big, for
an internal task force. Stakeholders in this debate include
company financial and human resources officers, stock holders,
pension plan participants and beneficiaries, unions, and
financial markets. If they are not included in the process,
they are more likely to oppose the proffered solutions.
The Pension Stability Act ensures that the recommendations
of the Blue Ribbon Commission are addressed by requiring
congressional action within 120 days of the publication of the
Commission's report. This guarantees that comprehensive,
responsible pension reforms will be on the House and Senate
floor by April of 2006.
In summary, the Pension Stability Act solves the immediate
problems of the pension system, while respecting the need for
fiscal responsibility and ensuring that enactment of permanent
solutions remains in the forefront of congressional attention.
V. Cost Estimate
U.S. Congress,
Congressional Budget Office,
Washington, DC, December 4, 2003.
Hon. Judd Gregg,
Committee on Health Education, Labor, and Pensions,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Pension Stability
Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Geoffrey
Gerhardt.
Sincerely,
Elizabeth M. Robinson
(For Douglas Holtz-Eakin, Director).
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Pension Stability Act
Summary: The Pension Stability Act would make changes to
the Employee Retirement Income Security Act of 1974 (ERISA) and
the Internal Revenue Code that would affect the operations of
private pension plans. Specifically, the bill would make
changes to the way pension liabilities are calculated for
certain pension plans, which would affect both pension
contributions and premiums paid to the Pension Benefit Guaranty
Corporation (PBGC).
CBO and the Joint Committee on Taxation (JCT) estimate that
enacting the bill would increase federal revenues by $4.9
billion over the 2004-2008 period and reduce revenues by $190
million over the 2004-2013 period. CBO estimates that the bill
would increase direct spending by $367 million over the 2005-
2013 period. In addition, CBO estimates the bill would increase
spending subject to appropriation by $1 million annually over
the 2004-2006 period, assuming appropriation of the necessary
amounts.
CBO has reviewed the non-tax provisions of the bill and
determined that they contain no intergovernmental mandates as
defined in the Unfunded Mandates Reform Act (UMRA). Those
provisions also would impose no costs on state, local, or
tribal governments.
The bill would make changes to ERISA that would temporarily
alter existing private-sector mandates related to the funding
of private, defined-benefit pension plans. CBO estimates that
the net effect of those provisions would be to reduce the
direct cost of the mandates imposed by ERISA on plan sponsors.
Estimated cost to the Federal Government: The estimated
budgetary impact of the Pension Stability Act is shown in the
following table. The costs of this legislation would fall
within budget function 600 (income security).
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By fiscal year, in millions of dollars--
---------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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CHANGES IN REVENUES
Estimated Revenues........................................ 2,719 3,636 1,137 -1,026 -1,566 -480 -1,136 -1,620 -1,045 -809
CHANGES IN DIRECT SPENDING
Estimated Budget Authority................................ 0 132 102 82 26 25 0 0 0 0
Estimated Outlays......................................... 0 132 102 82 26 25 0 0 0 0
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Estimated Authorization Level............................. 1 1 1 0 0 0 0 0 0 0
Estimated Outlays......................................... 1 1 1 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office and Joint Committee on Taxation.
Basis of estimate: For the purposes of this estimate, CBO
and JCT assume the bill will be enacted early in 2004.
Revenues
The bill would temporarily replace the interest rate used
in determining pension funding and variable-rate premiums paid
to the PBGC. Under current law, such liabilities and premiums
are determined using the interest rate on 30-year Treasury
securities. The bill would replace that rate through December
31, 2006, with the rate of interest on amounts conservatively
invested in long-term corporate bonds. Because this change
would reduce the contributions sponsors would have to make
toward their pension plans, taxable profits would increase and
yield higher tax receipts. JCT estimates that the bill would
increase federal revenues by $2.7 billion in 2004 and by $4.9
billion over the 2004-2008 period; it would reduce revenues by
an estimated $190 million over the 2004-2013 period.
Direct Spending
Temporary Replacement of the 30-Year Bond Rate. Under
current law, pension plans are required to determine whether
they are fully funded by discounting future pension liabilities
using the interest rate based on the moving four-year average
for 30-year Treasury bonds. Sponsors of plans that are
considered underfunded must make contributions to their plans
in addition to paying variable-rate premiums to the PBGC based
on the amount of underfunding. The Pension Stability Act would
allow plans to use interest rates on high-grade, long-term
corporate bonds to discount their liabilities during plan years
2004, 2005, and 2006. The exact rate to be used by plans would
be determined by the Secretary of the Treasury.
Interest rates on corporate bonds are generally higher than
those on Treasury bonds. Using a higher interest rate to
discount liabilities results in lower projections of the cost
of future liabilities. Therefore, firms would have to
contribute less to their plans and pay less in variable-rate
premiums. Based on information provided by the PBGC, CBO
assumes that the applicable corporate bond rate would be
roughly 150 basis points higher than the interest rate on 30-
year Treasury bonds. CBO estimates that using this higher rate
to discount liabilities would reduce the liabilities of
underfunded plans by about $30 billion by plan-year 2007. As a
result, we estimate that premium receipts would decrease by
$367 million, or 4.7 percent, over the 2005-2013 period.
Because the PBGC's premiums are offsetting collections to a
mandatory spending account, reductions in premium receipts are
reflected as increases in direct spending.
The use of higher interest rates could have other effects
on the PBGC's costs, but the direction and magnitude of these
effects are uncertain. On the one hand, the use of higher
interest rates to discount future liabilities would reduce
sponsors' contributions, improve their financial position, and
make it less likely that they would eventually become bankrupt.
Thus, the policy might reduce the number of plans that the PBGC
ultimately takes over. On the other hand, the lower
contributions would mean that the underfunding for plans that
eventually become the responsibility of the PBGC would be
greater, thus adding to the agency's costs.
Spending Subject to Appropriation
The legislation would establish a commission designed to
study issues related to defined-benefit pension plans and issue
a report by December 31, 2005. The commission would be composed
of 11 representatives from the executive and legislative
branches, plus two members of the public appointed by the
President. Commission members would not be compensated for
their work, but travel and other expenses would be paid for by
various government agencies. Based on the experience of other
commissions of similar scope, CBO judges that this provision
would cost about $1 million annually over the 2004-2006 period.
Estimated impact on state, local, and tribal governments:
CBO has reviewed the non-tax provisions of the bill and
determined that they contain no intergovernmental mandates as
defined in UMRA. Those provisions also would impose no costs on
state, local, or tribal governments.
Estimated impact on the private sector: The bill would make
changes to ERISA that would temporarily alter existing private-
sector mandates related to the funding of private, defined-
benefit pension plans. Changing the interest rate required to
be used by plans to determine the present value of their
pension obligations would reduce the direct cost of the
mandates now imposed by ERISA on sponsors of pension plans.
Previous CBO estimates: On November 21, 2003, CBO
transmitted a cost estimate for H.R. 3108, the Pension Funding
Equity Act of 2003, as passed by the House of Representatives
on October 8, 2003. H.R. 3108 would replace the 30-year
Treasury rate with a corporate bond rate for a period of two
years (plan-years 2004 and 2005), rather than the three-year
period specified by the Pension Stability Act. CBO estimated
that H.R. 3108 would decrease premium receipts by $279 million
over the 2005-2013 period and increase revenues by $304 million
over the 2004-2013 period.
On November 18, 2003, CBO transmitted a cost estimate for
H.R. 1776, the Pension Preservation and Savings Expansion Act
of 2003, as ordered reported by the House Committee on Ways and
Means. H.R. 1776 contained various pension reform proposals,
including a provision to replace the 30-year Treasury bond rate
with a corporate bond rate for three years, the same period of
time provided by the Pension Stability Act. CBO estimated that
this provision of H.R. 1776 would decrease premium receipts by
$469 million over the 2005-2013 period. The estimate for the
Pension Stability Act differs from that for H.R. 1776 because
CBO revised the methodology it used to determine premium
receipts once the Treasury rate is reinstated.
Estimate prepared by: Federal Revenues: Annabelle Bartsch;
Federal Outlays: Geoffrey Gerhardt; Impact on State, Local, and
Tribal Governments: Leo Lex; and Impact on the Private Sector:
Daniel Wilmoth.
Estimate approved by: Robert A. Sunshine, Assistant
Director for Budget Analysis and G. Thomas Woodward, Assistant
Director for Tax Analysis.
VI. Application of Law to the Legislative Branch
The bill amends laws that apply only to private pension
plans and does not apply to the legislative branch.
VII. Regulatory Impact Statement
The Pension Stability Act would make changes to the
Employee Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Code that would affect the operations of
private pension plans. The committee has determined the
regulatory impact of these changes to be minimal.
VIII. Section-by-Section Analysis
Section 1. Title
The bill provides that it may be cited at the ``Pension
Stability Act.''
Section 2. Temporary replacement of interest rate on 30-year Treasury
securities with interest rate on conservatively invested long-
term corporate bonds
The legislation makes several changes to the Employee
Retirement Income Security Act and the Internal Revenue Code of
1986 to replace the 30-year Treasury bond rate with a composite
corporate rate as the benchmark for determining certain pension
obligations. The bill creates a special rule for the years
2004, 2005, and 2006, during which the permissible range of
interest rates and benchmark for determining current
liabilities are different from current law. The permissible
range is defined during this three-year period as 90 percent to
100 percent of the new benchmark.
The new benchmark shall be the weighted average of the
conservative long-term corporate bond rates during the four-
year period ending on the last day before the beginning of the
plan year. The Secretary of Labor, in consultation with the
Secretary of the Treasury, is directed to determine the rate
through regulations on the basis of two or more indices that
are in the top two quality levels available reflecting average
maturities of 20 years or more.
The bill makes conforming amendments to repeal out-of-date
lookback rules and clarifies that the appropriate rate in 2007
shall be 105 percent of the 30-year Treasury bond rate.
The bill extends the special rule for 2004, 2005, and 2006,
for determining the interest rate for PBGC variable rate
premiums in Section 4006(a)(3)(E)(iii) of ERISA.
Finally, in adjusting a benefit in a form other than a
straight life annuity for purposes of determining the annual
benefit limit of a defined benefit plan under IRC Section
415(b)(2)(E)(ii), the interest rate is changed from 5 percent
to 5.5 percent.
Section 3. Commission on defined pension benefit plans
The legislation establishes a 13-member bipartisan blue-
ribbon commission to consider reforms to the defined benefit
system and to make recommendations to Congress. Membership in
the commission includes the Secretaries of Labor and the
Treasury, and the Director of the Pension Benefit Guaranty
Corporation, or their designees, two members of the general
public selected by the President, and one member each selected
by the chair and ranking member of the Senate Health,
Education, Labor, and Pensions Committee, the Senate Finance
Committee, the House Education and the Workforce Committee, and
the House Ways & Means Committee.
The scope of the commission purview is broad, but clearly
delineated. Among the commission's specific areas of inquiry
are the following: How to reform the defined benefit funding
and liability rules, the appropriate interest rates for valuing
plan liabilities, variable rate premiums, lump sum
distributions, the impact of reforms on investment policy and
capital markets, appropriate mortality assumptions, including
collar adjustments, appropriate transition protections and the
need to avoid volatility, and how to create incentives and
avoid disincentives to the creation and expansion of defined
benefit plans.
The commission is empowered to conduct public hearings,
receive testimony, and make comprehensive legislative
proposals. It must report its findings and recommendations to
Congress by December 31, 2005.
Section 4. Congressional action
The bill provides that Congress must act on the
recommendations of the defined benefit commission within 120
days after receipt of the commission's report.
Section 5. Effective dates
In general, the amendments in the legislation providing a
temporary replacement interest rate become effective for plan
years beginning after December 31, 2003.
For purposes of applying certain rules (``lookback rules'')
to plan years beginning after December 31, 2003, the amendments
made by the provisions may be applied as if they had been in
effect for all years beginning before the effective date. For
purposes of the provision, ``lookback rules'' means: (1) the
rule under which a plan is not subject to the additional
funding requirements for a plan year if the plan's funding
current liability percentage was at least 90 percent for each
of the two immediately preceding plan years or each of the
second and third immediately preceding plan years; and (2) the
rule under which quarterly contributions are required for a
plan year if the plan's funded current liability percentage was
less than 100 percent for the preceding plan year. The
amendments made by the provision may be applied for purposes of
the lookback rules, regardless of the funded current liability
percentage reported for the plan on the plan's annual reports
(i.e., Form 5500) for preceding years.
A one-year transition rule is provided to ensure that no
person shall receive a lesser amount due to the change in
prescribed interest rate under IRC Section 415.
Finally, amendments made by the legislation shall not apply
to plan years beginning after December 31, 2006.
IX. Changes in Existing Law
In compliance with rule XXVI paragraph 12 of the Standing
Rules of the Senate, the following provides a print of the
statute or the part or section thereof to be amended or
replaced (existing law proposed to be omitted is enclosed in
black brackets, new matter is printed in italic, existing law
in which no change is proposed is shown in roman.)
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
PENSION STABILITY ACT
* * * * * * *
Subchapter I--Protection of Employee Benefit Rights
* * * * * * *
Subtitle B--Regulatory Provisions
* * * * * * *
Part 5--Administration and Enforcement
* * * * * * *
519. Commission on Defined Pension Benefit Plans.
* * * * * * *
MINIMUM FUNDING STANDARDS
Sec. 302. (a)(1) * * *
* * * * * * *
(b) * * *
* * * * * * *
(5) * * *
* * * * * * *
(B) * * *
* * * * * * *
(ii) * * *
(I) In general.--Except as
provided in subclause (II) or
(III), the term ``permissible
range'' means a rate of
interest which is not more than
10 percent above, and not more
than 10 percent below, the
weighted average of the rates
of interest on 30-year Treasury
securities during the 4-year
period ending on the last day
before the beginning of the
plan year.
(II) Special rule for years
2004, 2005, and 2006.--In the
case of plan years beginning
after December 31, 2003, and
before January 1, 2007, the
term ``permissible range''
means a rate of interest which
is not above, and not more than
10 percent below, the weighted
average of the conservative
long-term corporate bond rates
during the 4-year period ending
on the last day before the
beginning of the plan year. The
Secretary, in consultation with
the Secretary of the Treasury,
shall, by regulation, prescribe
a method for periodically
determining conservative long-
term bond rates for purposes of
this subclause. Such rates
shall reflect the rates of
interest on amounts
conservatively invested in
long-term corporate bonds and
shall be based on the use of 2
or more indices that are in the
top 2 quality levels available
reflecting average maturities
of 20 years or more.
[(II)] (III) Secretarial
authority.--If the Secretary
finds that the lowest rate of
interest permissible under
subclause (I) or (II) is
unreasonably high, the
Secretary may prescribe a lower
rate of interest, except that
such rate may not be less than
80 percent of the average rate
determined under [subclause
(I)] such subclause.
* * * * * * *
(d) * * *
* * * * * * *
(7) * * *
* * * * * * *
(C) * * *
(i) * * *
* * * * * * *
(IV) Special rule for 2004,
2005, and 2006.--For plan years
beginning in 2004, 2005, or
2006, notwithstanding subclause
(I), the rate of interest used
to determine current liability
under this subsection shall be
the rate of interest under
subsection (b)(5).
* * * * * * *
(e) * * *
(1) * * *
* * * * * * *
[(7) Special rules for 2002 and 2004.--In any case in
which the interest rate used to determined current
liability is determined under subsection
(d)(7)(C)(i)(III)--
[(A) 2002.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years
beginning in 2002, the current liability for
the preceding plan year shall be redetermined
using 120 percent as the specified percentage
determined under subsection (d)(7)(C)(i)(II).
[(B) 2004.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years
beginning in 2004, the current liability for
the preceding plan year shall be redetermined
using 105 percent as the specified percentage
determined under subsection (d)(7)(C)(i)(II).]
(7) Special rule for 2007.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years beginning
in 2007, current liability for the preceding plan year
shall be redetermined using 105 percent of the annual
rate of interest on 30-year Treasury securities for
such preceding plan year as the specific percentage
determined under subsection (d)(7)(C)(i)(II).
* * * * * * *
PART 5--ADMINISTRATION AND ENFORCEMENT
* * * * * * *
SEC. 519. COMMISSION ON DEFINED PENSION BENEFIT PLANS.
(a) Establishment of the Commission.--
(1) Establishment.--There is established, subject to
the Federal Advisory Committee Act, the Commission on
Defined Benefit PensionPlans (in this section referred
to as the ``Commission'').
(2) Membership.--The Commission shall be composed of
13 members of whom--
(A) 1 shall be the Secretary or their
designee;
(B) 1 shall be the Secretary of the Treasury
or their designee;
(C) 1 shall be the Executive Director of the
Pension Benefit Guaranty Corporation or their
designee;
(D) 2 shall be appointed by the President
from among members of the general public;
(E) 1 shall be appointed by the chairman of
the Committee on Health, Education, Labor, and
Pensions of the Senate;
(F) 1 shall be appointed by the ranking
minority member of the Committee on Health,
Education, Labor, and Pensions of the Senate;
(G) 1 shall be appointed by the chairman of
the Committee on Finance of the Senate;
(H) 1 shall be appointed by the ranking
minority member of the Committee on Finance of
the Senate;
(I) 1 shall be appointed by the chairman of
the Committee on Education and the Workforce of
the House of Representatives;
(J) 1 shall be appointed by the ranking
minority member of the Committee on Education
and the Workforce of the House of
Representatives;
(K) 1 shall be appointed by the chairman of
the Committee on Ways and Means of the House of
Representatives; and
(L) 1 shall be appointed by the ranking
minority member of the Committee on Ways and
Means of the House of Representatives.
(3) Period of appointment; vacancies.--Members shall
be appointed for the life of the Commission. Any
vacancy in the Commission shall not affect its powers,
but shall be filled in the same manner as the original
appointment.
(4) Quorum.--A majority of the members of the
Commission shall constitute a quorum, but a lesser
number of members may hold hearings.
(5) Chairperson and vice chairperson.--The Commission
shall select a Chairperson and Vice Chairperson from
among its members.
(b) Duties of the Commission.--
(1) Study and recommendations.--The Commission shall
conduct a thorough study of, and shall develop
recommendations on, the following issues relating to
defined benefit pension plans:
(A) How to reform the defined benefit pension
plan funding rules to increase participants'
benefit security, provide rational and
predictable funding rules for employers, and
protect the financial independence of the
Pension Benefit Guaranty Corporation.
(B) The relevance and effectiveness of the
current liability rules, and, if such rules are
maintained, an analysis of alternative
valuation measures for those rules, including
the rationale for the measures as well as their
strengths and weaknesses.
(C) The appropriate interest rates that
should be used in valuing plan liabilities, the
variable rate premium, and lump-sum benefits,
including whether the rates proposed are
transparent, widely understood, publicly
available, and resistant to manipulation.
(D) Whether the recommended interest rate
would impact the investment policy of the
pension trust along with an analysis of
theimpact on capital markets, the cost of maintaining a pension plan
over the long term, and the compatibility of any effect on investment
policy with the fiduciary requirements to diversify investments under
this Act.
(E) The appropriate mortality assumptions
that should be used in valuing plan
liabilities.
(F) whether such assumptions should contain a
collar adjustment or should otherwise be
adjusted to reflect the workforce covered by
the plan.
(G) A consideration of other actuarial
assumptions used in valuing plan liabilities.
(H) Whether the same interest rate should be
used for purposes of both funding and lump sum
benefits, including consideration of the effect
on plan funding and other purposes for which
the interest rate is used if such rate is
different for those purposes.
(I) The effect of the interest rate on
participants' decisions whether to elect lump
sum benefits.
(J) The appropriate means of providing
transition protection to participants in the
event changes are enacted.
(K) Whether the same interest rate used for
funding purposes should also apply for other
purposes for which the rate of interest on 30-
year Treasury securities is currently used.
(L) The need to avoid volatile funding
obligations and how to reform the law to avoid
such volatility, including volatility
attributable to the recent downturn in the
equity markets and significant decrease in
interest rates.
(M) The need for predictability, simplicity,
and transparency with respect to the
calculation of funding obligations, and how to
reform the law to achieve such goals.
(N) Effective means that would provide for
additional funding in favorable economic
periods, so that funding levels can withstand
market downturns without requiring large
contributions during adverse economic
conditions.
(O) How to design transition rules so that
funding reforms do not cause short-term
hardships for employers or employees.
(P) How to ensure that revisions to funding
obligations do not discourage employers from
maintaining pension plans.
(Q) How to ensure that required disclosure of
funding information is material and relevant
without requiring disclosures that impose
disclosure requirements that are unnecessarily
burdensome, are misleading with respect to the
funded status of an ongoing plan, or are not
adjusted to reflect the size of the plan.
(R) Other funding and benefit reforms that
would promote the creation and expansion of
defined benefit plans.
(2) Report.--Not later than December 31, 2005, the
Commission shall submit a report to the appropriate
committees of Congress containing a detailed statement
of the findings and conclusions of the Commission,
together with the recommendations for such legislation
as it considers appropriate (including proposed
legislative language to implement the recommendations).
(c) Powers of the Commission.--
(1) Hearings.--The Commission may hold such hearings,
sit and act at such times and places, take such
testimony, and receive such evidence asthe Commission
considers advisable to carry out this section. The Commission shall, to
the maximum extent possible, use existing data and research prior to
holding such hearings.
(2) Information from federal agencies.--The
Commission may secure directly from any Federal
department or agency such information as the Commission
considers necessary to carry out this section. Upon
request of the Chairperson of the Commission, the head
of such department or agency shall furnish such
information to the Commission.
(3) Postal services.--The Commission may use the
United States mails in the same manner and under the
same conditions as other departments and agencies of
the Federal Government.
(d) Commission Personnel Matters.--
(1) Compensation; travel expenses.--Each member of
the Commission shall serve without compensation but
shall be allowed travel expenses, including per diem in
lieu of subsistence, at rates authorized for employees
of agencies under subchapter I of chapter 57 of title
5, United States Code, while away from their homes or
regular places of business in the performance of
services for the Commission.
(2) Staff and equipment.--The Pension Benefit
Guaranty Corporation shall provide all financial,
administrative, and staffing requirements for the
Commission, including--
(A) office space;
(B) furnishings; and
(C) equipment.
(e) Termination of the Commission.--The Commission shall
terminate 180 days after the date on which the Commission
submits its report under subsection (b)(2).
* * * * * * *
Subchapter III--Plan Termination Insurance
Subtitle A--Pension Benefit Guaranty Corporation
SEC. 1306. PREMIUM RATES.
(a) Schedules for Premium Rates and Bases for Application;
Establishment, Coverage, etc.--
(1) * * *
* * * * * * *
(3)(A) * * *
* * * * * * *
(E)(i) * * *
* * * * * * *
(iii) * * *
(I) * * *
* * * * * * *
(V) In the case of plan years beginning after
December 31, 2003, and before January 1, 2007,
the annual yield taken into account under
subclause (II) shall be the annual yield
determined by the Secretary on amounts
conservatively invested in long-term corporate
bonds for the month preceding the month in
which the plan year begins. For purposes of the
preceding sentence, the Secretary, in
consultation with the Secretary of the
Treasury, shall, by regulation, prescribe a
method for periodically determining
conservative long-term bond rates. Such rates
shall reflect the rates of interest on amounts
conservatively invested in long-term corporate
bonds and shall be based on the use of 2 or
more indices that are in the top 2 quality
levels available reflecting average maturities
of 20 years or more.
INTERNAL REVENUE CODE
SEC. 412. MINIMUM FUNDING STANDARDS.
(a) General Rule.-- * * *
(b) * * *
* * * * * * *
(5) * * *
* * * * * * *
(B) * * *
* * * * * * *
(ii) * * *
(I) In general.--Except as
provided in subclause (II) or
(III), the term ``permissible
range'' means a rate of
interest which is not more than
10 percent above, and not more
than 10 percent below, the
weighted average of the rates
of interest on 30-year Treasury
securities during the 4-year
period ending on the last day
before the beginning of the
plan year.
(II) Special rule for 2004,
2005, and 2006.--In the case of
plan years beginning after
December 31, 2003, and before
January 1, 2007, the term
``permissible range'' means a
rate of interest which is not
above, and not more than 10
percent below, the weighted
average of the conservative
long-term corporate bond rates
during the 4-year period ending
on the last day before the
beginning of the plan year. The
Secretary of Labor, in
consultation with the
Secretary, shall, by
regulation, prescribe a method
for periodically determining
conservative long-term bond
rates for purposes of this
paragraph. Such rates shall
reflect the rates of interest
on amounts conservatively
invested in long-term corporate
bonds and shall be based on the
use of 2 or more indices that
are in the top 2 quality levels
available reflecting average
maturities of 20 years or more.
[(II)] (III) Secretarial
authority.--If the Secretary
finds that the lowest rate of
interest permissible under
subclause (I) or II is
unreasonably high, the
Secretary may prescribe a lower
rate of interest, except that
such rate may not be less than
80 percent of the average rate
determined under [subclause
(I)] such subclause.
* * * * * * *
(l) Additional Funding Requirements for Plans Which Are Not
Multiemployer Plans.--
(7) * * *
* * * * * * *
(C) * * *
(i) * * *
(I) * * *
(IV) Special rule for 2004,
2005, and 2006.--For plan years
beginning in 2004, 2005, or
2006, notwithstanding subclause
(I), the rate of interest used
to determine current liability
under this subsection shall be
the rate of interest under
subsection (b)(5).
* * * * * * *
(m) Quarterly Contributions Required.--
(1) In general.-- * * *
* * * * * * *
[(7) Special rules for 2002 and 2004.--In any case in
which the interest rate used to determine current
liability is determined under subsection
(l)(7)(C)(i)(III)--
[(A) 2002.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years
beginning in 2002, the current liability for
the preceding plan year shall be redetermined
using 120 percent as the specified percentage
determined under subsection (l)(7)(C)(i)(II).
[(B) 2004.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years
beginning in 2004, the current liability for
the preceding plan year shall be redetermined
using 105 percent as the specified percentage
determined under subsection (l)(7)(C)(i)(II).]
(7) Special rule for 2007.--For purposes of applying
paragraphs (1) and (4)(B)(ii) for plan years beginning
in 2007, current liability for the preceding plan year
shall be redetermined using 105 percent of the annual
rate of interest on 30-year Treasury securities for
such preceding plan year as the specific percentage
determined under subsection (l)(7)(C)(i)(II).
SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED
PLANS.
(a) General Rule.--
* * * * * * *
(b) * * *
* * * * * * *
(2) * * *
* * * * * * *
(E) * * *
* * * * * * *
(ii) For purposes of adjusting any
benefit under subparagraph (B) for any
form of benefit subject to section
417(e)(3), [the applicable interest
rate (as defined in section 417(e)(3))]
5.5 percent shall be substituted for
``5 percent'' in clause (i).
* * * * * * *