By Hazel Bradford; Pensions & Investments ~ Jun 29, 2012

The House and Senate on Friday passed legislation to give corporate pension plans some funding relief while also raising their premiums to the PBGC.

The changes were approved as part of a highway reauthorization bill, which also extends a student loan subsidy, and was approved in the House by a vote of 373 to 52 and in the Senate by a 74-19 vote.

The bill now goes to President Barack Obama, who is expected to sign it.

Instead of using the current method of calculating pension liabilities with two-year corporate bond interest rates, plan executives can now use a 25-year average corporate rate that is within a 10% range. That range will grow 5% per year, which will reduce the amount of relief available to sponsors each year. The new formula would raise the interest rates used to calculate liabilities to 6.7% from the current effective rate of 5.3%.

That new calculation formula is expected to immediately raise the funding levels of corporate defined benefit plans, with the Society of Actuaries estimating that the number of large corporate plans over 80% funded will rise to 91% from the current 62%, but the legislation also calls for disclosure of current calculations and funding levels, in addition to new formulas, adding to the potential for confusion, pension experts say.

The increased federal tax revenue that would come from reduced tax-exempt pension contributions made the changes politically acceptable to both Democrats and Republicans, along with another provision allowing for higher PBGC premiums. The bill calls for increasing flat-rate premiums to $42 per participant next year from $35, and then further hikes in later years. Variable-rate premiums, which would still be calculated by current interest rates, would also increase by a formula based on a plan’s funding level.

The PBGC premium increases made it a mixed victory for pension plan executives. “While we strongly support pension stabilization, we do not believe that Congress should be including an increase in PBGC premiums as a trade-off,” said Scott Macey, president and CEO of the ERISA Industry Committee, in a news release.

— Contact Hazel Bradford at hbradford@pionline.com