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Current pension legislative outlook — reviewing 2011 — looking forward to 2012

January 5, 2012

In this article we review 2011 retirement policy activity and discuss the 2012 policy agenda.

Legislation

Action (or inaction) in Congress in 2011 was dominated by struggles over the budget, a high level of partisanship and a lot of policy gridlock. Three major retirement benefits-related issues were considered — a reduction in defined contribution plan contribution limits in connection with comprehensive tax reform, an increase in Pension Benefit Guaranty Corporation premiums and further defined benefit plan funding relief. No legislation was introduced with respect to any of these issues, but we expect them to continue to figure in legislative activity.

Comprehensive tax reform and DC contribution limits

2011 was marked by increasing focus on the cost of current retirement benefit programs and whether that cost is justified. While this issue transcends the current struggle over the budget, escalating pressure to reduce expenditures, increase revenues, and, perhaps, comprehensively reform the Tax Code, have made Congressional action on contribution limits much more likely.

We most recently surveyed this issue in our article Tax reform and retirement savings. Focus appears to be on the DC plan 'tax expenditure,' estimated to be around $50 billion per year. The key issues appear to be: (1) Is the current system 'fair' or does it 'unfairly' benefit mainly higher paid participants? (2) Is the current system effective, that is, does it meaningfully increase retirement savings? In our article Differing views on the "fairness" and effectiveness of 401(k) retirement savings incentives, we review data and testimony at Senate hearings on these issues.

In response to these budget and policy concerns, some have proposed a reduction in DC contribution limits, and during discussions of possible 2011 budget compromises, such a reduction was, as we understand it, under active consideration.

PBGC premiums and DB funding relief

Budget issues and the dramatic decrease in interest rates during 2011 also raised the issue of increased Pension Benefit Guaranty Corporation premiums to cover PBGC's increasing deficit — an issue we discussed in our article Possible PBGC premium increase. Decreasing interest rates have also resulted in a significant decrease in funded status, and (for 2012) an increase in the funding obligation, for many DB plans, and there were reports that some in Congress were considering some sort of DB funding relief for 2012.

The budget and gridlock

We note that each of these three policy initiatives would raise revenues, and any urgency in Congress with respect to any of these issues is to a large extent driven by that fact.

As we all know, in 2011 nothing was done with respect to any of these issues. As we discussed in our November 2011 Current pension legislative outlook, a PBGC premium increase was to be part of the Supercommittee deal, and there was a possibility that either or both of DB funding relief or comprehensive tax reform might be part of a follow-on deal that would 'go big.' Instead, the Suprecommitte 'failed,' and the year closed with a squabble over the extension of 'payroll tax' relief and unemployment benefits, ending in an unusual 2-month extension of both.

Other initiatives

There were other pension-related initiatives in 2011 —

Senators Bingaman (D-NM) and Isakson (R-GA) re-introduced their "Lifetime Income Disclosure Act," requiring administrators of individual account plans (including 401(k) plans) to provide, at least annually, a "lifetime income disclosure" — showing the value of the participant's account as a "lifetime income stream."

Senators Kohl (D-WI) and Enzi (R-WY) introduced the "Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011" (SEAL) — making changes current law designed to prevent "leakage."

Congressman Kind (D-WI) introduced legislation making technical changes to the DB funding relief provisions of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA).

Senators Bingaman (D-NM) and Kerry (D-MA) re-introduced automatic IRA legislation.

None of these gained any legislative traction in 2011.

Thus, in 2011, the consequences of legislative gridlock were clear, at least with respect to pension legislation: very little happened.

Outlook for 2012

In 2012, we expect Congress to continue to focus on budget issues, and we expect it to continue to be gridlocked. Indeed, the problems that prevented action in 2011 will be exacerbated by the fact that 2012 is an election year.

It is still just barely conceivable that Democrats and Republicans can find a way to compromise over the spending and tax issues they debated throughout 2011. If they did, then we might see action on the key issues already identified — tax reform, PBGC premiums and DB funding relief.

But that possibility seems very unlikely. And with a short legislative year (because of the election), so does action on 'smaller issues' — even relatively non-controversial "lifetime income disclosure" legislation.

2012 elections

The 2012 elections can be viewed as a 'vote' on how to resolve the current budget, tax and spending issues. In that context, it will be worth considering the policy positions of the Presidential candidates, critically with respect to the issue of tax reform, as a clue to what will happen next for retirement savings policy.

The composition of the new Congress will also matter. If either the Republicans win the Senate or the Democrats win the House, legislation that cannot currently move may begin to move in a new, 'un-gridlocked' context.

Thus, it is likely that the 2012 election will be a more important event for retirement policy than any legislation in 2012.

Regulation

While the agencies continued to work on major projects in 2011, there was not a lot of 'new' regulation.

DOL

The Department of Labor completed the fee disclosure regulatory project in 2010. Regulations for provider-sponsor disclosure were, however, published in 'interim' final form — the main outstanding issue being whether a "summary" disclosure statement should be prescribed. DOL struggled with this last issue throughout 2011; as we understand it, the 'final final' rule is close to completion. DOL's other action with respect to the fee disclosure project was to push back the effective date for disclosures.

In 2010 DOL proposed a controversial re-definition of the term 'fiduciary' under ERISA. In 2011 DOL, after holding two days of hearings and under pressure from many in Congress, withdrew that proposal. Phyllis Borzi, assistant secretary for DOL's Employee Benefits Security Administration, has indicated that the regulation will be re-proposed sometime early in 2012.

The one major retirement benefits-related rule completed by DOL in 2011: in October, 2011, DOL finalized rules with respect to investment advice.

Other issues that may be the subject of DOL regulation in 2012 include further guidance on target date funds (including the long awaited plan fiduciary target date fund 'checklist') and 'retirement income' related guidance (including, perhaps, further guidance on the fiduciary issues with respect to DC annuity purchases).

IRS

There were no major regulatory projects either initiated or completed by IRS in 2011. The most significant regulatory project on which we may see action in 2012 is further clarification of rules with respect to variable cash balance plans.

Dodd-Frank

As we noted in our January 2011 Current pension legislative outlook, several critical issues under Dodd-Frank affect pension plans:

The treatment of swap dealers and major swap participants, in certain circumstances, as fiduciaries when they deal with plans.

The treatment of stable value contracts.

Whether plans may themselves be treated as major swap participants in certain circumstances, and the consequences of that treatment.

More generally, how the clearing requirement under Dodd-Frank will operate.

The Securities and Exchange Commission and the Commodities Futures Trading Commission continued work on these initiatives throughout 2011. The issues — not just in the pension-related areas but throughout the legislation — seem to be particularly difficult. The one major 'action' the regulators took in 2011 was to delay the effective date of the legislation.

A huge question for 2012 is whether the CFTC and SEC will be able to complete regulations implementing Dodd-Frank.

Accounting

In 2011, the International Accounting Standards Board (IASB) released final amendments to IAS 19 Employee Benefits. The new rule dramatically revised accounting for DB plans, to a large extent eliminating the "smoothing" of period-to-period measurements. It did not, however, require marking to market DB performance in operating income. Instead it took a "middle" approach of booking returns on the net plan asset (liability) to the income statement calculated using the plan's discount rate assumption and marking actual performance to other comprehensive income.

It is unclear what approach the US Financial Accounting Standards Board intends to take with respect to DB accounting — whether it will re-begin its own project, adopt the IASB rule (as part of 'convergence') or simply do nothing. The issue of the convergence of IASB and FASB accounting rules is being re-evaluated. In 2012 we may see some broad outline of FASB's way forward on DB accounting, although final action will certainly not take place in 2012.

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We've tried to identify the major pension policy issues, as we see them, as of the beginning of 2012. We will continue to update you on them and on any other retirement benefits-related issues that arise as the year progresses.

The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.

Information set out or referred to above has been obtained from sources believed to be reliable. However, neither Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. Neither Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.