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A regulatory disconnect threatens the future of DB plans

By jeremy.engdahl-johnson

Defined benefit (DB) plans have been getting beaten up by all sides. Some want to pretend they don’t exist, though, as we have noted, DB plans aren’t on the path of irreversible decline. There are others, like the folks at the BNA Advisory Board, who “believe that such plans are the best vehicle for providing retirement security.”

On their Pension and Benefits Blog, BNA blogger Scott Macey recently illuminated a contradiction between what Congress intended and the actions regulators have taken on hybrid DB plans that threatens to stop some of the best DB plans from ever seeing the light of day and to push sponsors to abandon their current DB offerings. In the post, Macey points to the disconnect between the intent of the Pension Protection Act of 2006 (PPA) and how it has been applied. Here is the crux of his argument:

It was hoped that the guidance that Treasury and IRS needed to issue would recognize the intent of PPA to foster hybrid plans by providing guidance that clarified and applied PPA provisions in a positive and flexible manner consistent with the Congressional intent. In some ways, the agencies have done that, but, for the most part, the guidance has been based on a principle that is fundamentally at odds with Congressional intent; While Congress sought to clear a place in the regulatory jungle for hybrid plans to grow, the regulators appear to view the PPA as imposing new limits on hybrid plans to rein them in — and a complicated web of regulations imposing significant and unanticipated new restrictions and requirements has ensued.

For regulators to get on the same page as the PPA they must consider all the comments they got in recent hearings on PPA regulations, including expanding their definition of market rate of return and providing more guidance on pension equity plans. If the PPA is used to squash, rather than protect, hybrid DB plans, the future of the DB system as a whole will grow much dimmer.

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