Panel to Debate Pension Measure

A bill heading for final approval in Congress as early as this week could save companies hundreds of millions of dollars in pension costs over the next two years. Critics say it could also weaken retirement security for workers whose pension plans go belly up.

Parts of the legislation are so controversial that the White House has threatened to veto it. But corporations widely support the measure. Worker advocates, industry experts and legislators see it as only a first step -- and a baby one at that -- in an overdue effort to shore up the nation’s pension system.

“It will not make anyone’s pension more secure, and it will not restore lost pension benefits,” said Rep. George Miller (D-Martinez) of the bill, which has been passed by both the House and Senate and goes to a joint conference committee this week. “It is merely a stopgap measure.”

The bill would, however, lend a crucial hand to defined-benefit pensions by making a simple change to the interest rate used in pension calculations, employers say. Defined-benefit plans, which pay fixed monthly sums to retirees, cover about 44 million working Americans and have become increasingly troubled in the last three years.

There are two culprits: Investment returns soured at the beginning of the decade, cutting into the stockpiles that companies set aside to fund their future pension obligations, and interest rates dropped, boosting the amount companies must set aside today to fund tomorrow’s obligations.

Pension laws require companies to hold reserves equal to the amount they’ll need to fund future pension obligations. A required reserve amount can swing wildly, depending on the rate of return a company expects to earn on its investments. The rate of return is generally pegged to market interest rates; the lower interest rates go, the more the company needs in reserve.

If, for example, a company assumed it would earn just 3% on its invested assets, it would need to set aside $41 million today to have $100 million 30 years from now. If it expected to earn 7%, it would only need to set aside $13 million to generate nearly $100 million in that time.

Interest rates remain at historically low levels, but pension experts maintain that the big problem is that the interest rate federal law dictates for pension calculations -- the 30-year Treasury bond -- is artificially low. The reason: The 30-year Treasury bond hasn’t been issued in more than two years.

Under the bill going to a conference committee this week, the 30-year Treasury bond rate would be replaced with the rate on an index of high-quality corporate bonds. Financially ailing airlines and steel companies, and possibly other firms, would be allowed to pay less to the federal pension insurance agency -- the Pension Benefit Guaranty Corp. -- for the next several years. It would give similar relief to troubled union pensions.

“That rate is broken and it has to be fixed,” said Lynn Dudley, a pension expert at the American Benefits Council in Washington. “Congress should not hold up that fix to debate anything else.”

Tying interest rates to corporate bonds is widely supported and almost certain to be in any final legislation. However, the timing of any such legislation is of huge import, said Howard Silverblatt, market equity analyst at Standard & Poor’s Corp. in New York.

Companies must report the status of their pension plans in the annual reports they release in April. If the bill is not signed into law before then, many plans could appear underfunded, which could force companies to add cash to meet minimum funding requirements, Silverblatt said.

Although this is mainly an accounting issue, with little effect on the ability of plans to meet their pension obligations, Silverblatt said it could force companies to cut other spending to feed the pension kitty.

“You are talking about literally billions of dollars,” he said.

The controversial part of the legislation -- and the reason President Bush has threatened to veto it -- relates to a provision that stipulates “deficit reduction contribution” relief.

Simply put, deficit reduction contributions are the amount of money that troubled plans must pay to the Pension Benefit Guaranty Corp., which backs the pension payments companies and unions promise their workers. The PBGC is suffering through its own funding crisis, recently revealing that its obligations exceeded its assets by a record $11.2 billion.

The Senate wants to give troubled steel companies and airlines the ability to pay less today, in the hope that they will regain profitability and be better able to pay premiums in the future. Other companies would also be eligible to apply for help.

Without this relief, certain companies with heavy pension obligations are likely to be driven into bankruptcy, Dudley said, which would make the PBGC’s situation even worse.

The White House opposes anything that would weaken the PBGC and is demanding that this provision be eliminated.

Congressional aides acknowledge that any reduction in the amount that companies pay into the pension insurance system raises the chance that taxpayers would eventually have to bail out the pension system, just as taxpayers bailed out bank depositors in the 1980s.

“At the moment, this is an investor issue,” Silverblatt said. “But, if things get worse, it could be an issue for retirees, if their plans can’t afford to pay benefits -- or even for taxpayers.”

The legislation could also play into the longer-term debate over what type of retirement plans Americans will lean on in the future.

Several decades ago, defined-benefit pensions were the primary type of retirement plan for most workers in the U.S., Hass noted. That put all of the risk of investing and all the responsibility of saving on companies. Today, defined-benefit plans are largely being replaced by defined-contribution plans, such as 401(k) plans, which shift both the risk and the responsibility for retirement savings to workers.

“We are putting all of the risk on employees who are the people least able to bear that risk,” Hass said.

Hass asserts that by making defined-benefit plans more attractive to employers, companies will have an incentive to retain traditional pension plans, which will benefit workers by ensuring guaranteed retirement income.