Ten years ago today President George W. Bush signed into law the Pension Protection Act of 2006. It was the largest, most comprehensive U.S. pension reform bill since the mother of them all, the Employee Retirement Income Security Act of 1974. Though the new legislation was promoted as a means of preventing future funding problems in private sector defined benefit plans, the act has not lived up to its name. In fact, some pundits refer to the PPA as the “Pension Destruction Act.”
“The Pension Protection Act is one of the greatest failures of retirement legislation of all times,” says Joshua Gotbaum, guest scholar in economic studies at Washington think tank the Brookings Institution and former director of the Pension Benefit Guaranty Corp.
The PPA is primarily a two-pronged regulation designed to address issues with both defined benefit pensions and defined contribution savings plans. While most retirement industry experts agree that the law neither improved nor protected private sector defined benefit pensions, many find a silver lining in the advances made in the defined contribution arena. The members of that optimistic bunch — including mutual fund, insurance and recordkeeping companies that sell retirement investment products and services — almost universally believe that the PPA’s official approval of savings plan enhancements like automatic enrollment, auto escalation and qualified default investments (managed accounts, target date funds and balanced funds) was a boon to retirement savings.
“For DC plans in particular, the PPA did a lot of good things,” says Sabrina Bailey, global head of defined contribution at Northern Trust Asset Management in Chicago. “It raised awareness that people had to save for retirement and helped people with asset allocation through default options,” she adds.
“Ten years out PPA has been pretty successful on the DC side,” agrees Bradford Campbell, a former assistant secretary of Labor and, as head of the Employee Benefits Security Administration (EBSA) from 2006 to 2009, responsible for implementing the new regulation. “On the DB side we’ve been beset by problems we couldn’t predict.”
Campbell is referring to the global financial crisis that struck in 2008, just as the PPA was being enacted. Many well-funded pension plans were caught in the maelstrom, which cost them billions of dollars in assets and decimated their funded status. The years of low interest rates and volatile equity markets that followed have made it extremely challenging for plan sponsors to repair their asset losses.
On the 401(k) plan side, the introduction of auto enrollment helped boost assets from $3 trillion in 2007 to $4.7 trillion at the end of 2015. Some argue that despite those healthy numbers the asset management industry, not the individual participant, has been the primary beneficiary. Part of the blame stems from the fact that beyond a handful of the very largest U.S. corporations, defined contribution plan participants pay higher fees for investments than defined benefit plan sponsors do and invest without professional management, longevity pooling, mandatory participation or annuitization of future payouts — all things that make a traditional pension valuable.
Although 401(k) assets have ballooned, the needle has barely moved on the number of workers who are participating in these savings plans. At the end of 2013, only 51.2 percent of the private workforce in the U.S. was saving in defined contribution plans, just above the 50 percent participation rate in 2006, according to the Employee Benefit Research Institute in Washington.
When it comes to traditional defined benefit plans, the Pension Protection Act — despite its name — has done little to slow their steep decline. Their demise was already well advanced when the dot-com crash came in 2000, a year that saw 1,892 plan terminations. By 2014 that total had grown to 20,674.
From the Worker, Retiree and Employer Recovery Act of 2008 to the Bipartisan Budget Act of 2015, six pension funding relief amendments have been passed to try to stanch the damage wrought by too-stringent plan funding requirements built into the PPA. “What funding relief did was essentially undo the PPA,” notes Zorast Wadia, project and consulting actuary with Milliman in New York. Actuarial practitioners have asked why liabilities decades out are, under the PPA, determined by a yield curve based on current interest rates, he says. The current low interest rates would not have hurt pension funds pre-PPA, Wadia contends. “The point can be made that if PPA hadn’t come into existence, plan sponsors could use a long-term method of measuring liabilities and wouldn’t have seen PBGC [premium] costs rise,” he says.
A regulation to prevent future pension failures seemed like a good idea after a slew of steel companies and airlines, including Bethlehem Steel Corp., LTV Steel Corp., U.S. Airways and United Airlines — which represented the largest claim ever on the PBGC — declared bankruptcy and terminated their defined benefit plans between 2003 and 2005. In 2005 alone more than $10 billion in pension assets landed at the PBGC, which was created under ERISA. The PBGC collects premiums from plan sponsors and is responsible for paying a percentage of the promised pension benefits to participants in terminated plans.
Not all members of Congress were happy with the two bills that ultimately were negotiated to produce the PPA, introduced in 2005 by John Boehner, then chairman of the House Committee on Education and the Workforce, and Charles Grassley, chairman of the Senate Finance Committee. Earl Pomeroy, then a Democratic member of the House Ways and Means Committee, which with Education and Workforce had jurisdiction over pensions, explains that only his committee chairman, California Republican Bill Thomas, was allowed to provide input on the bill.
“I believe the bill was motivated in part by the Department of Labor under George W. Bush to hasten the utter demise of defined benefit pensions,” says Pomeroy, an 18-year representative from North Dakota who is now senior counsel in the Washington office of law firm Alston & Bird. “I thought it was a bill that purported to strengthen pensions while it undermined pensions in the market by making them more expensive and more volatile.”
Pomeroy’s initial fears came true when, shortly after the PPA went into effect, the global financial crisis hit, demolishing the funded positions of many pension plans. “Was the bill that was struck correct?” asks former EBSA director Campbell. “That’s a fair debate to have.” Holly Fechner, a partner at Washington law firm Covington & Burling, was policy director for senator Ted Kennedy, the ranking Democrat on the U.S. Senate Committee on Health, Education, Labor and Pensions, and worked on the PPA. She says, “We did go too far because what we’ve seen is that significant increases in premiums and funding rules pushed employers out of the system.”
The PPA “very quickly became a set of rules that required plan sponsors to calculate funding shortfalls,” notes Matthew McDaniel, Philadelphia-based defined benefit risk leader at consulting firm Mercer. “We’ve really yet to find the right balance to bring pensions to a reachable market liability while giving plan sponsors some flexibility in contributions. We don’t want plan sponsors to have a zero contribution one year and $200 million the next.”
Ten years after the PPA, with traditional pensions on the wane and their replacement by individual savings plans offering a less than ideal benefit, there is clearly more work to be done to ensure retirement security for millions of working Americans. “We still have 50 percent of workers with no pension or savings plan,” says Karen Friedman, policy director at the Washington-based Pension Rights Center. “That issue was not addressed by the PPA.”
A few far-thinking retirement experts have been pushing for the creation of a new system. History has proved this is possible: Australia, for example, created a new retirement system in the 1980s, before the fund industry could grow large enough to gain control over it, as happened in the U.S. Much more recently, in 2010 the U.K. was able to create a comprehensive scheme of individual retirement accounts invested by a number of low-cost, high-quality fund managers, including the government-sponsored National Employment Savings Trust and NOW: Pensions, a 30-basis-point, all-in diversified pool managed by the team at ATP, the universal Danish pension fund. And there’s room in that system for higher-fee fund companies, such as Legal & General Group, to compete as well.
One idea gaining traction is the multiple-employer plan, in which numerous employers place their workers in a big pooled retirement vehicle with the benefits of economies of scale, lower fees and professional fund management while maintaining the individual accounts favored by the defined contribution world. This would require a change to ERISA but not nearly as large a change as the Pension Protection Act demanded. All that is needed is the desire by citizens to see the U.S. workforce reach a secure retirement, and a bipartisan effort by the U.S. Congress.