Rep. Earl Pomeroy (D.-N.D.), a central figure on pension issues in Congress, March 13 indicated an interest in revisiting the Pension Protection Act of 2006, saying enactment of the law was based on a “snapshot.”

“A snapshot can be most deceiving when you are talking about long term liabilities of a pension plan being out over many, many decades,” Pomeroy told a seminar on tax, budget, and legislative policies sponsored by the Washington, D.C.-based law firm of Baker & Hostetler.

“The extraordinary additional funding pressure that plans will face because of the PPA that we didn't need in all instances, will cause the freezing and termination of pension plans,” Pomeroy said. IBM's and Xerox's freezing of their defined benefit pension plans last year was “truly unfortunate,” he added.

Interest rates and stock market evaluations play a prominent role in what a pension plan will look like at any given point in time, Pomeroy added. Fortune 100 companies are now 102 percent funded, but no credit is due to the PPA because “the new law hasn't started yet,” he added.

Outliving Retirement Savings.

A factor causing economic insecurity in Americans today is fear of outliving retirement savings, Pomeroy said.

The statistics are staggering concerning longevity, Pomeroy said. A couple at the age of 55 has a 50 percent chance that one of them will live to the age of 92 and a 25 percent chance one will live to 97, and that's with today's technology, he said.

“None of us knows how long we're going to last,” Pomeroy said. “Longevity risk is impossible to self insure,” he said. This is the type of issue that will be even more prevalent as public policy evolves in this economically insecure age, he said.

Pomeroy has called for an annuity component to defined contribution plans for greater economic security (17 PBD, 1/26/07; 34 BPR 250, 1/30/07). He said an annuity provides fundamental income security in retirement, offering an income stream for life.

Ownership Agenda.

“In response to this phenomenon of ... greater economic insecurity, I maintain that the 'ownership agenda' has been completely toned down,” Pomeroy said.

The ownership society has at its core the promise of unbridled opportunity, Pomeroy said. However, “we now know the flip side,” he said

“You own your opportunities and you own, without much relief, your risks, your downside risks,” Pomeroy said. He cited the following as the downside risks of the ownership agenda:

• having a lower minimum guarantee and inflation adjustment for Social Security benefits in privatization proposals;

• having to reach a $5,000 deductible in medical savings accounts;

• shifting to defined contribution plans, where the risk of investment loss is on the individual participant, “compared to the cash flow promise and security of defined benefit pension plans;” and

• adding benefit caps under health care reform.

“This is not what people want,” Pomeroy said. These downside risks provide the political force that will drive policy relative to responding to the economic insecurity issue, he asserted.

Defined Benefit and Defined Contribution Plans.

Pomeroy noted that defined benefit plans offer cash flow assurance that people want as they face an indeterminate number of years in retirement, he said.

If an employer only offers a tax code Section 401(k), the better the match, the better the employee response will be, Pomeroy said.

However, he cautioned that he would not advise a company to freeze its defined benefit pension plan, increase the match in the 401(k) plan, and call it square. In the end, this substantially dilutes the savings of an employee, Pomeroy said.

Providing an employee with both a defined benefit pension plan and a defined contribution plan would be ideal, he said.

Regarding 401(k) defined contribution plans, Pomeroy said there is no better savings incentive than the employer match in these plans. “I think that's excellent,” he said.

Executive Compensation.

There are legitimate concerns about ever-increasing executive compensation, Pomeroy said.

Boards have not been sufficiently diligent on this issue, Pomeroy said. He referred to the Home Depot board of directors embarrassment allowing a $210 million payment to a terminated executive. “I hope that the shame they carry ... offers a chilling effect on others,” he said.

“Let's have the market place provide the rules here,” Pomeroy said. “I'd like to have, for shareholder meetings, very clear information on executive compensation,” he said.

“I know that Chairman Barney Frank is thinking about a nonbinding vote, a guidance, from shareholders, would be a good thing in terms of providing direction to the board in terms of whether they are getting this executive compensation thing right or not,” Pomeroy said. Rep. Frank (D-Mass.) is chairman of the Financial Service Committee.

By Michael W. Wyand