The U.S. Economic Crisis and Its Impact on Pensions

Value collapse of financial assets such as corporate equities and bonds has contributed to pension plan losses of as much as $2 trillion—roughly 20 percent of their value—in the United States. As a result, employers that sponsor defined benefit plans are facing unexpected financial obligations imposed by the Pension Protection Act of 2006.

With retirement security at risk for millions of citizens, the American Benefits Council prepared a 10-point plan to provide immediate relief to plan sponsors and participants. In addition to calling for revisions to PPA funding requirements, the plan addresses the threat of Social Security fund insolvency and seeks to protect retirees from excessive untimely distributions. In one of its final acts of 2008, Congress on December 11, approved the Worker, Retiree and Employer Recovery Act (H.R. 7327). President Bush signed the act into law on December 23.

This legislation provides defined-benefit plan funding relief and other technical corrections to the PPA. Many businesses with defined-benefit plans face financial crisis if they comply with the law and fully fund their plans while value of the plans erode.

While the measures do not erase funding obligations, they do adjust certain payment schedules set up in the PPA and provide some relief to individuals and companies with defined benefit plans in light of the economic downturn.

Among its provisions, the Worker, Retiree and Employer Recovery Act does the following:

• Permits pension plans to smooth out unexpected asset losses to take unexpected gains and losses into account over a 24 month period
• Permits plan sponsors to temporarily freeze the status of an endangered multiemployer plan at the funding status held in the immediate preceding plan year
• Allows seniors who are 701⁄2 years of age not to have to make withdrawals from their IRA accounts and 401(k) retirement funds as currently mandated

Newly installed President Barack Obama is also expected to pursue major policy changes that would significantly affect the U.S. pension landscape and retirement plan system. Read more…

Republished with permission of International Pension Lawyer magazine. This article was originally published in the November 2008 issue.