Provision to Ease Pension Problems May Hinder Talks

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Provision to Ease Pension Problems May Hinder Talks
Hill Panels Differ on Aiding Plans

Albert B. Crenshaw, The Washington Post

November 7, 2003

When the House discussed legislation last spring to update rules for funding corporate pension plans, some members began talking up a special provision to spare troubled airlines from making extra payments. Attacked as a "rifle shot" assisting a single industry, the provision didn't make it into the pension bill the House passed.

This fall, when the Senate Finance Committee approved its version of a pension bill, it included a provision that would assist not only airlines but all of the weakest and most underfunded pension plans in the country.

Now, as Congress heads toward adjournment, that provision threatens to complicate negotiations between the Senate's Finance Committee and its Health, Education, Labor and Pensions Committee, which has approved its own pension bill without that relief. It could also become a factor in any House-Senate conference needed to enact more general pension funding changes being vigorously sought by industry.

The relief provision would allow companies with the most underfunded pensions to avoid putting as much as $29 billion into their plans over the next three years. Those savings are almost as great as those expected from a more general revision of funding rules, which would cut cash infusions by as much as $30 billion over three years, according to the Pension Benefit Guaranty Corp., the government pension agency.

When the two are combined, the weakest plans could receive as much as $40 billion of relief over the next three years, according to PBGC figures. That makes the agency and the Bush administration unhappy with the special assistance, officials said.

Senate sources say it is highly likely that the broader deficit-reduction provision will end up in whatever bill goes to the Senate floor, because a number of senators have made their support contingent on it. That is, in part, because a number of troubled companies, particularly in industries including airlines and steel -- along with several unions -- are anxious to see the measure become law.

Backers call the provision essential to get weak companies and their pensions "over the hump" of the current weak economy. Critics call such relief irresponsible and reminiscent of the events leading up to the savings-and-loan crisis.

The proposed changes are part of a broad debate on Capitol Hill over steps to take to avoid a crisis in the nation's private pension system, which since 2000 has been hit by the double whammy of a declining stock market and historically low interest rates. The stock market has reduced the value of the assets that companies have set aside to pay for their future pension promises, and the low interest rates cause the value of those promises to rise when figured on a present-value basis.

Compounding pension plans' problems is a decade-old requirement that they base their liability calculations on the interest rate of the 30-year Treasury bond. That security has been discontinued by the Treasury, and demand for the remaining ones has pushed the effective rate on them even lower than other market rates.

A temporary fix expires at the end of the year, and companies are lobbying vigorously for a permanent solution, lest they be forced to pour more cash into their pensions at a time many can ill afford to.

The House measure would allow companies to use a corporate bond rate, which is substantially higher than the Treasury rate, for two years, during which Congress, employers and the administration would work out a permanent solution. The Senate Health, Education, Labor and Pension Committee's version contains a somewhat similar provision.

The Finance Committee measure also contains a temporary shift to a corporate bond rate but then moves to an administration-backed plan that would require companies to use interest rates matching the age of their workforce, which backers regard as a counterbalance to relief measures in the bill.

The extra relief in the Finance Committee bill applies to "deficit reduction" contributions, which are special payments that companies generally are required to make to their pension plans when their funding falls below 90 percent of liabilities. These payments can be quite large, and in the view of backers of the relief provision, they tend to make bad economic conditions worse by siphoning cash when companies can least afford it.

Business is divided on the issue. Most companies are more interested in replacing the Treasury bond rate, but some, especially airlines, are interested in the deficit provision.

"These are really two very, very different proposals, and in order to keep people from being confused, as an organization we are going to stick to the [Treasury bond] replacement issue," said Janice Gregory of the ERISA Industry Committee, an organization of large employers. "That is not a relief provision," Gregory said. "The deficit-reduction contribution [provision] is just flat out relief."

Labor is in a similar position, with some unions very much in favor and others largely unaffected by the deficit funding matter.

"It's entirely appropriate for Congress to take short-term financial distress into account when considering pension funding policy, but exceptions need to be crafted narrowly to avoid compromising adequate funding in the longer term," said J. Mark Iwry, former Treasury benefits tax counsel, now at the Brookings Institution.

If lawmakers feel that certain industries deserve government help, they could consider providing it directly, rather than through the "back door" of pension policy, he added. "The choice Congress faces is how to share the pain" among shareholders, creditors, workers, pensions and taxpayers in assisting a troubled industry, Iwry said.