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Letter to Chairman Baucus About Pension Issues

The Honorable Max Baucus
United States Senate
Chairman, Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

Dear Chairman Baucus:

Last week, Business Roundtable shared some ideas on possible ways to improve the current economic situation. This letter provides additional information on the pension funding issues that we raised and urges you to take immediate action to address the problems that have been created for pension plans by recent economic conditions.

The sudden decline in the value of pension plan assets, when coupled with the current credit crunch, places defined benefit plan sponsors in a very difficult position. Plan sponsors are confronting unexpected funding obligations that greatly exceed even the most conservative forecasts and budgets. Resources that must be devoted to meet the unexpected new funding mandates will have to be diverted from maintaining payrolls and will delay the business investments necessary to preserve jobs and ultimately spur the recovery.

Let me emphasize, this is much more than a cash flow issue. It is a jobs issue and a broader economic issue that directly affects every American. Dramatically larger pension contribution requirements during an economic downturn reduce capital spending and exaggerate economic cycles. “Procyclical” pension funding rules result in an economy that overheats more during upturns and has deeper recessions during downturns. That is precisely the economic threat we face today — large and unexpected pension contribution requirements will dampen the economic recovery and lead directly to greater job loss from the current recession.

Dr. Robert F. Wescott, former Chief Economist at the Council of Economic Advisors, and a distinguished team of academic reviewers have reached the same conclusion. They examined the interaction of the pension funding rules and economic cycles and concluded that procyclical funding requirements result in greater job loss during recessions.

Business Roundtable member companies currently sponsor retirement plans benefiting millions of workers and retirees. We believe that pension plans must be prudently funded. Pension promises that are made must be kept because the retirement security of millions of Americans is dependent on it. Predictable and steady funding rules are important because they allow employers to make the long-term financial plans and commitments that are required when taking on pension obligations.

We urge immediate action to address this crisis. Specific steps you should consider are:

Smoothing. Congress should enact the provision already passed by the House and Senate as part of PPA technical corrections legislation that makes clear that smoothing of asset gains and losses over 24 months is permitted under PPA. In order to make the asset smoothing change effective in this period of sharp market declines, Congress should temporarily remove the “corridor” that limits the benefits of the smoothing rule.

Transition to New Funding Rules. The transition to new funding targets that was created in 2006 should be modified to reflect the new economic reality. The funding target for 2009 should remain 92% and the transition funding regime should apply not only to those at or above the phased-in funding target but also to those below these targets.

Permit New Funding Elections. Congress should permit defined benefit plan sponsors to change their funding elections for 2009 and 2010.

Sincerely,

John J. Castellani

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