| Private pensions in the United States |
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| 24/02/2008 | |||||||||||||||||||||||||||||||||||||||||
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The corporate pension debate in the US continues to divide experts in the aftermath of the Pension Protection Act of 2006. The sweeping legislation strengthened funding rules and liberalised requirements for defined contribution (DC) plans. The disagreement is over whether the reforms for DB plans will stabilise the system or encourage companies to further cut their plans. The 2006 legislation required companies that under fund their pension schemes to pay additional premium. It also raised caps on the amount that employers can invest into their pension plans to keep their pensions solvent during market downturns. Other reforms include an extension of a requirement that allows companies that terminate their pension plans to provide additional funding for the pension insurance system. Finally, companies were required to measure the obligations of their pension plans more accurately, according to a White House fact sheet. The legislation also made permanent the higher contribution limits for IRA and 401(k)s that were approved in 2001.
Experts argue that US corporate pension funds are considerably weaker at the start of 2008 and potentially face a protracted market downturn. The Pension Benefit Guarantee Corp (PBGC), the federal body that protects worker pensions, estimates that in 2000, 36,000 companies DB plans covered more than 34m workers and retirees. Their combined funding deficit in 2000 was $39bn, according to PBGC. By 2005, DB plans had dropped to 28,000 with their combined shortfall having ballooned to $450bn. One of the roles of the PBGC is to assume the liabilities of newly bankrupt companies. The funding shortfall improved in 2006 due to strong investment returns and increased employer contributions. A survey by an affiliate of the Association of Financial Professionals that covered 112 corporate plan sponsors found that employers contributed $27bn in to their plans in 2006 compared to $23bn in 2005. Employers are waiting for regulations on new Pension Act Provisions, according to the Conference Board. "While the Act allows pensions from DB plans to be paid after age 62 to people who still work, it still does not clear up unanswered questions about rehiring retirees." Meanwhile, the savings shortfall does not seem to be shrinking, says Joan Boughton, senior VP at Fidelity Consulting. An average couple who retired in 2007 at age 65 needed $215,000 to fund future health care costs compared to their estimated current account balance of $128,000. At the same time, Boughton points out that participation in DC plans has declined from 60% in 2003 to 57% in 2006. VB and CM |
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Articles of the same Topic : Pension funds US |
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