Tuesday, October 2, negotiators in the Senate reached agreement on a compromise pension bill that will likely be considered in the immediate future by the full Senate. If passed, as expected, the legislative focus will move to the House of Representatives, which is anticipated to act later this year.

Of considerable interest is the bill's provision which would prohibit funding nonqualified deferred compensation arrangements in situations in which the corporation's defined benefit plan funding falls below certain levels. This concept was included in the Administration's original proposals last January and in the pension legislation in the Senate Finance and HELP Committees. As part of the compromise, however, the triggers for freezing deferred compensation funding have been narrowed so that it is likely to affect fewer corporations. Under the outlines of the provision, the nonqualified deferred compensation benefit funding freeze could occur in any of three situations:

1. when the plan sponsor is bankrupt;
2. when the funding of the defined benefit plan of the plan sponsor is less than 80% of the funding target established in this legislation (if the sponsor is non-investment-grade rated) or 60% (in all other cases);
3. the plan is terminated on an underfunded status.

1. Interest Rates. One of the driving forces behind this legislation is the anticipated expiration at the end of this year of the legislation on selecting interest rates for defined benefit plans. The PSTA will follow a yield curve proposal initially proposed by the Administration that will determine interest rates based on three yield curve segments using a 12-month unweighted average of investment-grade corporate bonds. This will be phased in over three years starting in 2007, with the current corporate rate and current use continuing to apply for 2006.
2. Valuation and Mortality Rates. Plans will have to determine their assets annually on a market basis or on a 12-month unweighted average starting in 2007. Plans will also be required to use a designated mortality table (RP2000) which will be revised every 10 years. Exceptions from this latter requirement may be permitted with IRS approval.
3. Funding. Like in NESTEG, the new funding rules as proposed in PSTA will establish a funding target and determine underfunding based on that target. Anything less than 100% will be considered underfunded. The new funding targets will be phased in over three years starting in 2007 except that for smaller plans, a five-year phase-in will be permitted. Any underfunding will be required to be amortized over seven years except that for airlines a 14-year funding regime will be put into place before the new rules are applicable.
4. Funding Changes. Plan sponsors that have non-investment-grade bond ratings and two years of declining bond ratings (starting in 2007) will have to fund towards an at-risk target liability in the third year. This funding requirement is phased in at 20% per year and will effectively accelerate the defined benefit plan funding requirements.
5. Benefit Limitations. Plans will not be permitted to increase benefits when a plan sponsor is in bankruptcy or, in general, if a plan is less than 80% funded. Further, lump-sum payments will be limited in circumstances.
   

   Once the Senate passes this bill, the focus on pension legislation will move to the House. The key players in the House of Representatives have indicated assurance that legislation will pass Congress this year, possibly as late as December.