Pension Protection Act of 2006 (PPA)

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The Pension Protection Act is the most comprehensive reform of the nation’s pension laws since the enactment of the Employee Retirement Income Security Act of 1974 (ERISA, P.L.93-406). It establishes new funding requirements for defined benefit pensions and includes reforms that will affect cash balance pension plans, defined contribution plans, and deferred compensation plans for executives and highly compensated employees.

Prompted by the default in recent years of several large defined benefit pension plans and the increasing deficit of Pension Benefit Guaranty Corporation (PBGC), the Bush Administration in January 2005 advanced a proposal for pension funding reform, which was designed to increase the minimum funding requirements for pension plans and strengthen the pension insurance system. The Administration pointed out several weaknesses of the rules that were then in place:

  • Sponsors of underfunded plans were not required to make additional contributions — called deficit reduction contributions — as long as their plans were at least 90% funded.
  • Because the interest rates used to calculate current pension plan liabilities were averaged over a four-year period and asset values used to calculate minimum funding requirements could be averaged over five years, neither plan assets nor liabilities were measured accurately.
  • Plans that were underfunded were sometimes able to amortize their funding shortfalls over periods as long as 30 years.
  • Some sponsors of underfunded pensions were able to avoid making contributions to their plans for several years because they had made contributions beyond the required minimum in the past. The use of these so-called “credit balances” led to greater underfunding of pension plans, according to the Administration’s analysis.
  • The possibility that the termination of defined benefit pension plans with large unfunded liabilities might eventually lead to the insolvency of PBGC — created by Congress in 1974 to insure defined benefit pension plans of private-sector employers — lent a particular urgency to the effort to mandate improved pension plan funding.

Although the PBGC receives no appropriations from Congress, it is generally acknowledged that if the agency were to become financiallyinsolvent — threatening the retirement income of the 44 million Americans who have earned benefits under defined benefit pension plans — Congress would have little choice but to step in and engineer a financial bailout of the agency.

In 2000, the PBGC recorded a $9.7billion surplus, but several years of falling interest rates and declining stock prices and the termination of several large, underfunded pension plans led to a rapid deterioration in the PBGC’s financial position. Nine of the ten largest pension plan claims for PBGC insurance occurred between 2001 and 2005. (These nine claims accounted for 63% of the total dollar value of claims made on the PBGC since the agency began operating in 1975. By2005, the PBGC had a funding deficit of $22.7 billion, only slightly lower than the record deficit of $23.3 billion that the agency posted in 2004.

Click here to download the full text of the regulations.

Source: US Department of Labor

Updated 7/29/09

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