Bush Seeks To Change Pension Calculation

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Bush Seeks To Change Pension Calculation

By Jonathan Weisman, Washington Post

July 8, 2003

The Bush administration yesterday proposed linking the calculation of corporate pension liabilities to corporate bond rates instead of Treasury bonds, which would lower the amount of money many companies would have to put into their pension plans.

The proposed legislation, unveiled at the Treasury Department, would also force companies to disclose more information to their workers about their pension plans' financial conditions, assets and liabilities. And it would prevent companies already facing serious troubles with their pension plans from offering new benefits or providing lump-sum payouts to retirees.

"You should keep the promises you make, and not make promises you cannot keep," said a senior official who briefed reporters on the details of the proposal on the condition of anonymity.

The administration had hoped to avoid the issue, at least for the president's first term. This spring, it proposed that Congress extend the current pension liability system for two years while Treasury and Labor Department officials wrestle with an alternative.

But congressional Republicans demanded that the administration come up with an entirely new plan that could be enacted this year. Business groups have been lobbying for changes in the federal law that determines how they calculate their pension liabilities.

Currently, companies with defined benefit pension plans -- which pay retirees a fixed annual sum -- must calculate whether the fund can meet its obligations based on interest rates offered on 30-year Treasury bonds. If a company knows it must start paying a retiree $30,000 a year in 20 years, its managers may only assume they will get interest on their funds totaling 120 percent of Treasury yields. And since those yields are extremely low, companies are having to put more money into their funds at a time when profits are scarce.

For example, General Motors Corp. assumed it would earn a 6.75 percent return on its pension assets when it calculated its liability last year, down from 7.25 percent the year before. But the automaker said if interest rates fall a quarter of a percentage point this year, its pretax pension expense would jump $120 million. GM announced last month it would issue bonds and convertible securities to raise about $10 billion, most of which would go into its U.S. pension fund, which ended last year underfunded by $19.3 billion.

The situation for such companies will get worse if Congress does not act by the end of this year, when the current law expires. Companies would then have to calculate interest based on 105 percent of Treasury yields, as they did before 2002. The House Ways and Means Committee plans to draft legislation this month to keep that "snap-back" from happening, a senior administration official said.

Corporations have put heavy pressure on the administration for relief, arguing that the money they were shoveling into their pension funds was money they could be investing to expand and hire new workers. The administration agreed last night.

Another senior administration official, also speaking on the condition of anonymity, argued that Treasury bills are backed by "the full faith and credit" of the U.S. government, a standard that is too high for a corporation.

"That doesn't reflect the nature of the pension promise," the official said.

For the first two years under the Bush proposal, all companies would use a long-term corporate bond rate to calculate pension liabilities, which would likely offer significant relief to many companies. Over the following three years, they would transition to a complicated "corporate bond yield curve."

That means companies with older workers and a substantial number of retirees would have to use shorter-term, lower-yielding corporate bonds to calculate their liabilities. Those companies could face a higher liability than under the current system, one official said. Companies with younger workers could use longer-term corporate bonds with higher interest rates. Those companies would have to contribute less money.

Business groups have lobbied hard for just such changes. One of those groups, the Business Roundtable, was once chaired by Treasury Secretary John W. Snow.

Falling stock prices and declining interest rates have shaved 15 percent from the value of the average pension plan in the past three years, according to Wall Street pension studies. Three-fourths of the companies in Standard & Poor's 500-stock index have defined-benefit pension plans, and those companies have now accumulated $249 billion in pension-fund deficits, according to Morgan Stanley.

The Pension Benefit Guaranty Corp., the federal government's insurer for defined-benefit pensions, has had its accounts swing from a $7.7 billion surplus last year to a $5.4 billion deficit as it assumes pension obligations for bankrupt companies.

An administration official said last night the new calculations were not about rewarding companies that ran up such debts but about finding a fairer and more accurate measurement of liability.

"The danger is if we don't come up with an accurate measure of liability," the official said. "Then we are just kidding ourselves if we think we even know the liabilities."