Business Pushing Pension Change

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Business Pushing Pension Change

By Albert B. Crenshaw, Washington Post

September 2, 2003

As Congress returns to work from its August recess this week, business lobbyists will be angling for quick action to overhaul the pension-funding system.

In theory, legislators have until the end of the session to resolve a multibillion-dollar question of how businesses must calculate their pension liabilities. That's when a temporary provision that papered over the problem for two years expires. If nothing is done, many of the nation's largest companies will be forced to make big cash contributions to their pension funds in 2004.

The effective deadline for action, however, is even sooner, said Janice Gregory of the ERISA Industry Committee, an organization of large employers. That's because companies begin budgeting in the fall and need to know where their pensions stand well before the end of the year.

The companies, and some experts, argue that the big contributions that could be required are unnecessary. They say that forcing businesses to make such contributions would gobble up cash that might otherwise go to purchases of plant and equipment, boosting the struggling economy. But others see the underfunded pensions, which are insured by the federal government, as a ticking time bomb that could explode into a crisis reminiscent of the savings and loan troubles of the late 1980s.

At issue is the formula that federal law requires companies to use in calculating liabilities for traditional pension plans.

To determine whether its plan is adequately funded, a company must add up the current market value of its assets and compare that to the "present value" of the benefits it has promised to pay in the future. If the assets are not equal or almost equal to the liabilities, the company has to put in cash to make up the shortfall.

To calculate the present value of its pension liabilities, a company adds up promised future benefits and discounts that sum back to the present using an interest rate as a discount factor. The lower the interest rate, the greater the liabilities.

Current law requires companies to use the interest rate on the 30-year Treasury bond in those calculations. Not only are overall interest rates near historic lows, but "long bonds" are no longer being issued, and demand for existing ones has pushed their prices up and their yields down even more.

Using that rate would send liabilities soaring at a time when the slumping stock market has sharply eroded asset values, leaving scores of plans severely underfunded.

Two years ago, Congress allowed companies to substitute a corporate bond rate for the Treasury one, easing the squeeze, but that is the provision that expires at year-end.

Employers want to be allowed to use a rate indexed to investment-grade corporate bonds, and they would like such a provision to be made permanent. But members of both houses have so far been unable to agree on a permanent solution.

Gregory said that while employers are pressing legislators to move quickly, it isn't clear what is going to happen. The House Ways and Means Committee has approved another temporary fix, but it is part of a much larger and controversial bill that among other things would expand tax breaks for retirement saving generally. Several bills are in various stages of preparation in the Senate, but their future is uncertain.

Rep. John A. Boehner (R-Ohio), chairman of the House Committee on Education and the Workforce, has scheduled a hearing on this and other pension issues for Thursday.

The issue "is clearly on the people's radar screen, but the mechanism" for dealing with it "is still unclear," Gregory said.

The Treasury Department, meanwhile, has proposed providing temporary relief that would be followed by a much more fundamental change that would compel companies to include in their computations the age of their workforces, because an older workforce would mean that benefits would have to be paid sooner. Employers oppose that, saying that while it might be appealing on a theoretical level, it would be unworkable in practice.

Also in the background is the issue of the legality of cash-balance pensions A federal judge in Illinois recently held that such a plan, operated by International Business Machines Inc., violates federal age-discrimination laws, and some companies that operate them are hinting they may seek congressional assistance if the Treasury Department cannot resolve the problem.

But cash-balance plans are highly controversial, and other firms focused on the traditional pension plans say they would rather not see such a controversial issue attached to theirs.