august 7 in twenty-eight

There have been some (in my opinion, ridiculous) legislative changes going on that you probably wouldn't have heard about unless your world is enveloped in pension plans. And mine is.

It's the Highway and Transportation Funding Act of 2014. And basically, the trust that is used to fund roads and such is on the verge of bankruptcy. They need more money. And you can't really just write a bill that says "this thing needs more money" without actually figuring out HOW to pay for it. So the solution (and this is the ridiculous part) is to create basically fake interest rates by which to measure the liability for pension plans.

Recently the interest rates that have been used to determine how a pension plan should be valued were based on two-year averages of corporate bond rates. This is arbitrary, but at least it's based on something current. The averaging helps protect against extreme fluctuations in rates, but the fact that it's only over a two-year period makes it relevent. Then, in 2012, plan sponsors for pension plans were getting concerned at how costly these plans had become. Interest rates were low, so the amount they were required to contribute to their plans were very high, and it was becoming burdensome. So a law was passed in 2012 called Moving Ahead for Progress in the 21st Century. It said that the interest rates that were to be used were going to be capped by a corridor of 27 YEAR averages, starting at a 10% corridor and increasing up to a 30% corridor. Suddenly interest rates were very high again and were going to be essentially phased out over a very short period of time (2016), giving some relief for a short period of time to plan sponsors who wanted to keep their pension plans ongoing, but were struggling to afford it.

Now, at a time when plan sponsors are no longer asking for relief, the government decided it needed more money and so decided to extend that corridor for several more years. This is going to generate revenue for them because the required contribution for plans is going to decrease. This means that plan sponsors don't have to put as much money into the trust to support their plans, and the government is assuming that plans are going to choose to not contribute more money than they have to. This results in more taxable revenue, and thus more taxes collected.

Additionally, each pension plan is insured by the Pension Benefit Guaranty Corporation (PBGC). They require that the plan determine its liability using the corporate bond yield interest rates WITHOUT smoothing them over two years, so that liability is usually even LARGER than either of the liabilities previously mentioned. Then, for each thousand dollars the plan is underfunded, the PBGC collects $14, in addition to collecting $49 per participant (and this is just for 2014. These amounts are scheduled to increase in future years). This amount really adds up. And if plan sponsors put less money into their pension plans, the plans will become even more underfunded using this liability, and thus the PBGC will collect even more money from each plan.

Here is my problem with this law. For one, pension plans cost money. They have to be funded eventually to pay for the future benefits that are going to be paid for the plan. It doesn't MATTER what interest rate you assume for liabilities, the cash which is going to come due is VERY real and is VERY set in stone (contrary to public opinions, most pension benefits that have already been earned cannot be taken away. This is where the PBGC comes in. If a company goes bankrupt or has to give up its pension plan to continue existing as a company, the PBGC takes it over and makes sure the benefits that were earned are going to be paid. Unless your benefit is very large, the benefits you've earned are not going to be reduced). This new liability is completely fake, and to support the fact that it is fake, we continue to use the "old" interest rates to determine the maximum amount a plan sponsor can contribute to a plan that is tax-exempt. We also continue to use those rates to determine whether the plan is in "trouble". If a plan is underfunded to a certain point (under 80% funded when comparing assets to liabilities), they have to report this status to the insurance company that backs most tax-qualified pension plans.

In short, the government is ENCOURAGING plan sponsors to fund their pension plans less than they should because it is going to generate more tax dollars. Pension plans are COSTLY. Many people rely on this income and this approach is irresponsible at best. I think it's reckless and is only going to further the crippling of pension plans.

Finally, it seems completely counterintuitive to me. Yes, the government is getting more tax dollars right now. But guess who has to take care of these pension plans when the plans terminate due to financial distress ten, fifteen years down the line? Yes, the government, because the government owns the PBGC. Talk about a conflict of interest. So HOW can you create this soon-to-be-law that could very well cost you billions down the line?

I realize that I care about this so passionately only because it's what I do for a living, but I think it's indicative of a much bigger problem: we don't mind passing these monumental costs and bad choices onto future generations because we can't accept the simple fact that benefits have costs. Very real, very expensive costs. Pension Actuaries are supposed to keep these liabilities and assets in check. The government requires that each pension plan have an actuary determine that liability so that companies can't get away with fraud or recklessness. But now our hands are tied because we are being forced by the IRS, which is forced by law, to value these plans using interest rates we don't agree with and funding methods which just make no sense. We are being turned into puppets.