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By Lisa Lambert
WASHINGTON (Reuters) - A top Republican senator unveiled legislation on Tuesday that would radically change public pensions by having life insurance companies pay benefits through annuity contracts, helping to alleviate the underfunding that has engulfed many plans.
The bill introduced by Utah Senator Orrin Hatch, the highest-ranking Republican on the Finance Committee, would have the government pay a premium each year to a state-licensed insurer in an amount equal to a set percentage of salary. Employees would then receive fixed income annuity contracts from the insurance company.
"A new public pension design is needed, one that provides cost certainty for state and local taxpayers, retirement income security for state and local employees and one that does not include an explicit or implicit government guarantee," Hatch said in a speech to the Senate.
Annuities function similarly to pension plans by paying set amounts in regular installments. The accumulation of annuity contracts would even out interest-rate fluctuations, according to Hatch, who would have insurers competitively bid for them.
Underfunding is "not possible," he added.
The bill would not cover past pension liabilities, but allow state and local governments "to stop digging the hole with their existing defined benefit plans," said Julia Lawless, a spokeswoman for Hatch.
For years, states short-changed their retirement systems. When state and local revenues plunged during the 2007-09 recession, they cut contributions even more. At the same time, the financial crisis ravaged earnings on investments, which provide more than half of all pension funding.
There is no official figure for how badly public pension plans are underfunded. Pew Center on the States estimates they are short more than $850 billion for future retirees' benefits. In 2012, pensions in aggregate had enough assets to cover 73 percent of their liabilities.
Still, pension finances have improved in 2013, with states making greater contributions just as the stock market pushes pension assets to record levels.
Almost all the states, 47, have reformed their pensions in the last four years, although places such as Illinois have encountered political and legal resistance.
"We disagree with the premise of the bill that public plans are vastly underfunded, that it would lead public plans to come running to the federal government for a bailout," said Hank Kim, executive director of the National Conference on Public Employee Retirement Systems.
Kim said public pensions have lower costs than the private sector and the bill, which essentially shifts responsibilities to insurance companies "doesn't make sense."
"How is a for-profit entity going to have a better outcome than a non-profit entity that doesn't have to worry about shareholders and about turning a profit every quarter?" he said.
Hatch, who has been looking for a uniform solution to public pension problems for at least three years, noted that the cities of Stockton and San Bernardino, California, recently filed for bankruptcy, largely because of pension obligations, while some states face huge pension bills.
According Lawless, Hatch talked to insurers, unions state regulators and pension groups while drafting the legislation.
"From day one, however, this bill was driven by Senator Hatch alone and not at the urging of industry or outside groups," she added.
The U.S. Chamber of Commerce endorsed the bill, which would also put employees at small or start-up companies into annuities for retirement, as well as change federal oversight of 401(k)s and Individual Retirement Accounts. Trade groups related to annuities and insurance also back it, including the National Association for Fixed Annuities. The organization for insurance regulators said it would work with lawmakers.
Hatch's bill still faces challenges as it must pass the full Senate, where Democrats hold control.
Devin Nunes, a Republican Congressman from California who is active on public pension issues, has introduced his own bill in the House of Representatives.
"I welcome a debate on any well-meaning reform proposals, including Senator Hatch's bill, that seriously attempt to solve this critical problem," he said.
(Reporting by Lisa Lambert. Editing by Andre Grenon)