“ERIC understands that the PBGC believes that the current regulations should be revised,” Kathryn Ricard, ERIC’s senior vice president for Retirement Policy, said in the letter. “However, ERIC believes that the current regulations are appropriate and sufficient to protect the PBGC.”
In April, the PBGC issued proposed regulations under the Employee Retirement Income Security Act (ERISA) that would change the circumstances under which plan administrators must notify the PBGC of the occurrence of certain “reportable events” (see “PBGC Proposes Reduced Reporting Obligations”). In November 2009, the PBGC proposed increasing the reporting requirements by eliminating most reporting waivers permitted under the existing regulations, but withdrew the proposal after objections from ERIC and other organizations.
According to Ricard, the PBGC has the appropriate tools to identify at-risk plans with the existing reportable events rules, and the Pension Protection Act of 2006 (PPA) is working as intended to protect the interests of the PBGC and benefits earned by participants.
“The vast amount of information already available to the PBGC should enable it to identify plans for which it will need to negotiate funding improvements, intervene as a creditor, minimize funding shortfalls via involuntary plan termination, and take other protective action,” Ricard said.
Since the PPA was enacted, plan sponsors have been making required minimum contributions to improve their plans’ ERISA funding levels, Ricard said, and some have been contributing more than the required minimum amount. ERIC said that the proposed regulations would instead require plan sponsors to divert a portion of those contributions to pay service providers to help comply with burdensome regulatory requirements without materially enhancing the financial position of the PBGC.
Ricard also expressed concern that the safe harbors for plans and for companies in the proposed regulations are either unworkable or are not useful in their current form. The proposed regulations include safe harbors for plans that are either fully funded on a termination basis or that are 120% funded on a premium basis. Most companies do not regularly calculate their plans’ unfunded benefit liabilities on a plan termination basis, Ricard pointed out. She noted that the vast majority of plans will not qualify for the premium safe harbor.
According to Ricard, the proposed safe harbor would allow companies to avoid notifying the PBGC about certain reportable events only if, on the determination date, they met a lengthy list of criteria. Additionally, the safe harbor does not properly identify at-risk plans and would create unnecessary burdens for plan sponsors.
On behalf of ERIC, Ricard urged the PBGC to “recognize that the proposed safe harbor for companies—which relies on commercial credit reporting agencies, the absence of secured debt and net income—is ill suited for large companies. It will force companies to expend resources and adjust their business practices related to debt, is too unpredictable and is not a useful proxy for the financial soundness of the company as it relates to the risk to the PBGC.”
Ricard added that the PBGC’s safe harbor, as currently structured, is inconsistent with the objectives of the Obama Administration’s Executive Order 13563 to improve the regulatory rulemaking process and would interfere with the way companies conduct their business.
“A company’s compliance with pension regulations should not directly impact [the] unrelated decisions a company makes with its ongoing business concerns. Although we support the mission of the PBGC to ensure compliance with its regulations, we believe that under a true ‘cost-benefit’ analysis, this proposed safe harbor will not meet the standards set in Executive Order 13563,” Ricard said. “These proposed regulations will necessitate a domino of decision-making normally related to pure business endeavors in order to satisfy compliance with a regulatory safe harbor for pension plan administration.”
Ricard concluded the letter by urging the PBGC not to finalize the proposed regulations, noting that they create significant uncertainty for companies and would only put additional stress on the defined benefit system. “As a result [of the proposed regulations], company officers will need to evaluate whether they want to take the risk of having to file future reportable events, the costs that are involved to do so, and the risks to their lending and investment agreements,” she said. “Given the other uncertainties that already exist for defined benefit plans, more company officers may decide to freeze or no longer have the company sponsor a defined benefit plan.”
The full text of the comment letter can be found here.