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Veto Threat as Senators Approve Pension Bill
By Mary Williams Walsh, New York Times
November 17, 2005
The Senate passed a bill yesterday aimed at strengthening the nation's troubled system of company pension plans. But the White House called the measure inadequate and warned that President Bush was likely to veto it if it remained in its current form.
The bill requires companies to close any shortfalls in their pension funds and gives most of them seven years to do so. But it allows the financially ailing major airlines 20 years to close those gaps, a provision the White House said was unacceptable.
It also requires companies to calculate pension benefits in a way intended to avoid certain distortions that can make the funds look stronger than they really are.
The bill would increase the insurance premiums that companies must pay to the federal agency that guarantees pensions and would make them pay a fee to the agency if they file for Chapter 11 bankruptcy protection, terminate their pension plans and then emerge from bankruptcy.
The White House raised numerous objections to these measures, saying they had too many built-in delays and did not go far enough to close loopholes.
Senator Charles E. Grassley, Republican of Iowa and chairman of the Senate Finance Committee, a leading figure in the pension debate, said yesterday that the Senate had struck a useful compromise, calling its bill "a huge leap forward for retirement security." The measure was passed 97 to 2.
In the House, two bills have been approved by separate committees and are awaiting reconciliation, possibly next month. Both houses of Congress have been trying for months to plug loopholes in the current pension law, to make sure that companies set aside enough money to pay the benefits they owe and to provide adequate resources for the government agency, the Pension Benefit Guaranty Corporation. Some analysts have warned that without such changes, the whole pension system could eventually collapse, requiring a costly taxpayer bailout.
But the legislative effort has been slowed by warnings from business executives that if companies were forced to put unreasonable amounts of money into their pension plans, they would have to stop offering pensions entirely.
Organized labor, fearful of hastening the demise of a valuable type of benefit, has tended to side with business on the issue of pension funding, warning lawmakers against pushing companies too hard to put more money behind their promises.
The Pension Benefit Guaranty Corporation has been analyzing the various proposals. A recent study suggested that the Senate bill might not work as well as the lawmakers hoped yesterday. That analysis, completed by the federal agency in October, found that companies would contribute about 8 percent less to their pension plans over the next 10 years under the Senate bill's provisions than if nothing at all was done.
In 2006 alone, the analysis found that the bill - whose provisions would start slowly - would save companies about $21 billion on their pension contributions. The total savings over the next 10 years would be about $70 billion. And as companies put less money into the pension plans over time, more plans would fail and end up at the pension agency.
In January, the Bush administration outlined a vision of pension reform, but companies with pension plans said it was unrealistically tough. According to the pension guarantor's analysis, it would have required companies to put about $91 billion more into their pension funds over the next 10 years than under the existing law.
The Senate bill passed yesterday did contain several important provisions advocated by the administration, but with modifications that would make them take effect less quickly or less harshly.
One would require companies to start taking the ages of workers into account when measuring the total value of pension obligations. This method, called a yield curve approach, acknowledges that companies need to set aside more money as their workers approach retirement age, because the money will not have very much time to compound before the benefits start coming due.
Many analysts have warned that the approach now used by most companies - calculating their pension values as if their workers were all the same age - is potentially dangerous because it understates the total value of the benefits, particularly at companies with older work forces. If companies underestimate the value of their pensions, they will set aside less money to pay them, weakening the plans.
Companies have been particularly hostile to the idea of calculating pensions on the basis of a yield curve. They have argued that this would be unacceptably complicated. The Senate tried to address their complaints with a compromise that required companies to place their workers into three age categories and measure the pensions that way.
Another of the administration's goals was to take each company's financial health into account in determining the way it handles its pension plans.
Companies with junk credit ratings, as the administration saw it, were much likelier to default, not only on their bonds but on their pension obligations, so they would have to handle their pension plans much more cautiously. The Senate bill included this concept, but with a complicated array of phase-ins and exclusions.
Another provision of the bill would require employers to rein in the benefits they promise if their pension plans get into financial trouble. Under the current law, for example, companies that pay pension benefits in a single big check - called a lump-sum distribution - can keep on writing those checks even if their pension funds start running out of money, as recently happened at Delta Air Lines.
The Senate bill would brake such "bank run" situations, requiring companies to stop paying lump-sum distributions if their pension assets fell below 60 percent of total pension obligations. The administration had hoped for a tougher standard, barring lump-sum payments if assets fell below 80 percent.
The bill would also make companies freeze the growth of additional benefits if their pension assets fell below 60 percent of pension obligations. At the moment, there is no requirement that companies freeze these benefit accruals, no matter how weak their plans become.
Another provision of the bill would require companies to report the strength of their pension plans to employees every year. Current disclosure requirements make it quite difficult for an employee to find out if a pension plan is secure or not.
On the floor of the Senate yesterday, Mr. Grassley said, "we are here to fulfill the promise" of the 30-year-old pension law "and to let the American people know that if you've been promised a pension, we're going to make sure you receive it."
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