Jewish World Review

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

House bill would let corporations delay pension infusions | (KRT) The House of Representatives is scheduled to vote today on a bill that would provide two years' worth of relief to companies faced with making hefty contributions to their pension plans.

If the bill becomes law, it would mark the successful culmination of an intense lobbying campaign by the biggest corporate pensions in the country. In 2001, similar legislation gave companies a similar two-year reprieve, but that relief is running out at the end of this year.

"It should be smooth sailing," said Kevin Smith, a spokesman for the House Education & Workforce Committee, whose chairman, John Boehner, R-Ohio, is sponsoring the bill. "Doing this for two years will allow Congress to proceed with efforts to identify a permanent long-term solution to this pension underfunding crisis."

In recent months, the House and Senate have voted on, but not approved, a number of bills that would replace the 30-year Treasury bond, which is no longer being issued, as a measure of a company's pension obligation. The bill being voted on Wednesday, which appears likely to pass, would allow companies to instead use high-grade corporate bond rates as a measure.

While it may seem mundane to debate which bond rate to employ, falling interest rates have made bonds central to the issue of how deeply companies need to dig into their pockets to satisfy pension funding requirements.

"This bill is not about providing relief, it's about fixing a broken rate," said James Delaplane, who serves as special counsel to the American Benefits Council, an employer-backed organization that has lobbied for the change in the bond rate. "What companies have to contribute today is clearly artificially inflated, so this should bring the contributions back to the level they should be at to fund benefits."

Donate to JWR

Historically low rates have contributed to a pension funding shortfall among U.S. companies estimated at more than $350 billion. Lower rates magnify the size of the liability, while higher rates lessen it. And because corporate bonds carry higher rates than Treasuries, pensions would immediately appear to be better funded if Congress allows the use of the higher rate.

Another contributor to the massive shortfall is the 2½-year bear market that eroded pension funds' assets. Because of the complex pension accounting rules, there is a marked lag time between incurred losses and when a company has to contribute to get funding levels up to required levels.

In 2001, the temporary congressional measure upped the applicable rate from 105 percent to 120 percent of the 30-year Treasury bond rate. That relief runs out at the end of this year, which explains the lobbying campaign by companies that would have to shell out the most if the old rate were to be reapplied.

The difference between the current rate and the corporate rate being proposed could save companies about $25 billion annually over the next two years.

"Even subsequent to this legislation, companies will still be required to contribute significantly more to their pension plans to make up for asset declines," said Delaplane, an attorney with Davis & Harman in Washington, D.C.

The way some critics see it, companies will have to slay a beast of their own making.

"A big reason we got into this is the companies investing a lot of their pension money in the stock market," said Jeremy Bulow, professor of economics at the Stanford School of Business. "They made promises to pay workers a fixed amount of money and then took a lot of risk I'm not sure they had any business taking."

Stephen Kandarian, executive director of the Pension Benefit Guaranty Corp., the quasi-federal agency charged with insuring the nation's corporate pensions, recently told Congress that the health of the nation's private pensions is in a tenuous state.

Other bills, including some introduced in the Senate, would have provided more relief to companies, but the White House has indicated it would resist more aggressive measures in the face of the PBGC's record $5.7 billion deficit. The administration cited reports that the PBGC could fail and require a bailout on the magnitude of the savings-and-loan crisis of the 1980s.

The PBGC collects $800 million annually in premiums from companies currently offering pensions, but it expects to pay out at least $2.5 billion in benefits this year to retirees whose pensions it has taken over. The difference between the two reduces PBGC's asset base, which currently stands at $30 billion.

The nation's struggling manufacturing sector currently accounts for half the active private pension base, and the worry is that many of these cost-constrained companies will continue to terminate their plans, increasing the drain on the PBGC's assets.

"It's very likely that we see the PBGC left on the hook for a lot of money and see the PBGC in the same situation as the S&Ls," said Bulow, a consultant to the PBGC. "I mean, there is a cost, and somebody is going to have to pay for it."

Bethlehem Steel, which terminated its plan in December, is one of many examples of companies that contributed to the PBGC's burning through a $7.7 billion surplus and incurring a mammoth $11.3 billion loss last year. The PBGC's assumption of Bethlehem's plan resulted in a record $3.9 billion in new obligations for the agency. When US Airways recently terminated one of its pilots' pension plans, the PBGC took on $600 million more in liabilities.

UAL Corp., parent of United Airlines, has been lobbying for an addition to the current legislation that would give a reprieve through 2006 to companies whose plans are especially underfunded, as long as they were fully funded in 2000. That would exempt United and other companies with particularly weak pensions whose assets have fallen below 90 percent of their liabilities.

The White House has adamantly opposed such legislation, which would provide an estimated $30 billion of relief over three years. The concern is that taxpayers would be placed at a higher risk of bailing out troubled pensions.

"Letting them put off payments for three years is compounding the risk, because the liability will continue to grow," Bulow said. "It's just postponing the day of reckoning, but obviously there are a lot of politics involved here."

The House bill's sponsors are quick to point out that the measures being taken are temporary, with the objective of ensuring that there is adequate time to thoroughly address and analyze the complicated pension subject over the next two years.

"Our intention is to help stave off bankruptcies and prevent companies from terminating plans," Smith said. "And we think this is the most responsible approach to take in the interim."

Indeed, the ranks of companies offering the more traditional defined-benefit pension plan have dwindled in recent years. Among the companies in the Standard & Poor's 500 index, the number of companies that offer these plans has fallen from 410 to 371 in the last seven years, and the story is the same in the broader business community.

"It is a uniquely precarious time for the pension system," Delaplane said. "And frankly, this is an issue that reaches to the CEO level, and that's a rare thing."

Every weekday publishes what many in Washington and in the media consider "must reading." Sign up for the daily JWR update. It's free. Just click here.

Comment by clicking here.


© 2003, The Dallas Morning News Distributed by Knight Ridder/Tribune Information Services