Will the Pension Protection Act of 2006 (PPA) accomplish its purpose - Part 1 of 2

I had a client ask me a great question last week: “In your opinion will the Pension Protection Act of 2006 (PPA) accomplish its purpose and why to yes or no?“

Of course before responding I had to define the purpose behind PPA. After reading some committee reports and public statements made by the president and the congress I believe there were two main purposes to this legislation:

• Strengthen protections for the American workers’ pensions.
• Expand opportunities to build retirement nest eggs.

So now the question is: did PPA strengthen protections for pensions and expand opportunities to save? This first entry will address purpose #1: Strengthen Protections for Pension Plans

A detailed explanation of the changes made to DB plans under PPA is beyond the scope of this blog, but the basics are as follows: The Pension Protection Act of 2006

1. changed the funding rules, generally increasing the funding requirement to 100% of the present value of benefits earned,
2. changed the interest rate assumptions from Treasury rates to yield curves,
3. added additional requirements for at-risk plans,
4. placed restrictions on the use of credit balances.

In general, the legislation tried to balance the need to increase funding requirements with concerns that more stringent rules will cause employers to drop defined benefit plans in favor of 401(k) type arrangements.

Most of the actuaries I spoke to believe that legislation was needed to shore up the defined benefit plan system. However, some believe the details of PPA were “flawed” and that it was “rushed.” (The PPA technical correction bill from 2008 addressed some but not all of these flaws.)

A good and relatively understandable explanation of the legislative history surrounding these issues can be found here. It is interesting to note the roles played by the administration, various committees, and lobbyists in the creation of this law.

The general consensus, with which I agree, is that PPA was a good first step for fixing problems with our pension system, but is by no means a comprehensive solution. The bigger issue now is of course the recession. The recent economic downturn has had a much more profound impact on our defined benefit system. How we respond to this “crisis” will be important to the security of our retirement.

(Side note: interestingly enough 82% of US respondents to a recent CFO Research Services / Towers Perrin survey claim they have adequate access to cash in order to fund their DB plans for the next 2 years.)