Last week the US House of Representatives passed a bill to increase the discount rate and reduce the present dollar value of company pension liabilities. 
This is not just an issue for pension policy wonks, since reducing pension liabilities reduces pension deficits and in turn the cash contributions companies make to their pension plans. 

Increasing the liability discount rate lowers company pension contributions by an estimated $80 billion (£44 billion) over the next two years. 

Reducing the deficits by the stroke of a regulator's pen does not reduce the underlying risk of US pension underfunding and the mismatch caused by holding equities against bond-like pension liabilities. Rather, through the operation of the Pension Benefit Guaranty Corporation, it shifts the risk to US taxpayers. 

The PBGC is an agency of the US Federal Government and guarantees payment of basic pension benefits of 44 million people in benefit pension plans. 
At its September 2003 year-end it had an $11.5 billion deficit, based on assets of $35 billion and liabilities of $46.5 billion. It suffered a $7.6 billion loss during the year, including $3.6 billion from the failure of Bethlehem Steel - its largest single loss ever. In addition to losses already incurred, the PBGC calculates more than $85 billion of "reasonably possible" exposure to plans sponsored by junk-rated companies. 

The PBGC has warned that if Congress waived rules to accelerate funding to severely underfunded pension plans, its shortfall would grow by $40 billion over the next three years. 

The PBGC has a massive deficit simply because existing US pension funding targets are already too low. Against its legal funding target Bethlehem Steel was 84 per cent funded, but only 45 per cent funded on a wind-up basis. 
Contribution holidays are allowed even for seriously underfunded plans. US Airways had made no cash contributions for the four years prior to its pension plan being taken over by the PBGC in March 2003, with $2.2 billion in unfunded benefits. 

With the overwhelming equity weighting of US pension plans, the PBGC has written a "free" equity put option. Since the Federal Government backs the PBGC, its structural deficit will sooner or later have to be made good by the Government. The US Government's risk, and the extent of any bailout, could make the 1980s saving and loans (S&L) crisis look tame. 

The S&L crisis happened over many years while lawmakers, subject to fierce lobbying, continued to whistle in the dark, hoping that things would get better. 
The estimated cost of $150 billion to $200 billion was much higher than if the underlying problems had been addressed sooner. Rather than applying existing rules when problems first surfaced, hundreds of weak S&Ls were allowed to stay open; capital requirements were reduced and they were encouraged to expand into new risky deals. 

Pension funds, most spectacularly that of General Motors, which plans to hold $10 billion in "alternative assets" (non-investment grade bonds, private equity and "absolute return strategies") are trying to gamble their way out of a deficit. 
In designing the Pension Protection Fund (PPF) the UK Government must learn the obvious but painful lessons from the PBGC. The PPF must have powers to force companies to make up funding shortfalls over set periods against a tough and transparent solvency standard. The PPF must make an economic charge for risk, taking into account the size of deficit, the company credit risk, and the extent a plan holds bonds, not equities, to match its bond-like liabilities. 

The PPF must have a clear and credible "lender of last resort". In the US it is clear that the Government stands behind the PBGC but so far the UK Government is determined that the PPF should have no recourse to the taxpayer. Without government support the risk of failure of one scheme is borne by other companies, with losses clawed back by a super-levy. 
This cross-guarantee from stronger to weaker companies reinforces the structural weaknesses in the UK economy caused by cross shareholding through pension funds. 

The PPF is not a soft option. The UK Government must address the structural weaknesses in pension scheme regulation, rather than paper over the cracks, which the US Government is doing.