It is spring, but it already feels like November when US Congressional elections will take place. The political fall wind is already freezing any attempt to approve unpopular or controversial legislation. That explains why the US Congress left for its two-week Easter recess without approving a new pension legislation, which was expected to be the most sweeping set of changes since the enactment of the Employee Retirement Income Security Act (ERISA) nearly 32 years ago. The original goal was to tighten the rules of defined benefit (DB) plans, in order to make sure companies set aside enough money to make good on their promises to employees. Such promises are currently jeopardised by a $450bn ($368bn) ‘black hole’, the gap between their liabilities and the market value of their assets.
Not only did the Congress not approve the new bill, but according to some Washington insiders, negotiators modified many of the proposed rules and elaborated a compromise, which risks weakening the system and widening the $22.8bn deficit of the Pension Benefit Guaranty Corp (PBGC), the US agency that insures private pensions.
It may be not a coincidence that the PBGC head Bradley Belt announced his resignation in March 2005, while an analysis by the government’s agency warned that the House and Senate bills would lower corporate contributions to the already underfinanced pension system by $140bn to $160bn over the next three years. If true, the spectre of more pension plans failing will rise, and losses caused by the underfunded schemes of insolvent employers could lead to a $92bn bailout in today’s money, according to the Center on Federal Financial Institutions.
But “this perception is wrong”, claims John Engler, president of the National Association of Manufacturers. “For the overwhelming majority of companies that provide DB pensions – 47% of which are manufacturing companies - existing law and the new legislation would significantly increase their funding obligations in several ways,” he wrote in the USA Today. Engler says that the funding target would increase from 90% to 100%, and all plans would have to be 100% funded at all times. Besides, premiums paid to the PBGC have already increased 58% this year, from $19 to $30 per enrollee; and, among other changes, the discount rate used to calculate liabilities would shift from a corporate bond rate to a Treasury-derived yield curve, automatically increasing funding requirements. Employers suggest that if Congress approves an ‘anti-corporate’, ‘draconian, one size-fits-all legislation’ the ultimate result will be shutting down the remaining DB pension plans. Some companies, such as IBM and Verizon, have recently frozen their pension plans, arguing that their costs make it hard to compete.
If most companies will have to pay more for their DB plans, what dramatically changes the pension scenario is the possible ‘special provisions’ for specific industries. The Senate bill would give commercial airlines 20 years (more than three times longer than other employers) to fund plan liabilities, and allow them to use more favourable actuarial assumptions to value plan liabilities.
House Republican leader John Boehner initially opposed any industry specific relief, but on second thoughts he declared that “this idea of providing what we call a third way for companies that are in trouble does have merit” and hinted he is negotiating a broader approach to the problem, which could mean giving all troubled companies more time to put their houses in order. After the airlines, the next industry taking advantage of a relief would be the auto companies that have aggregate liabilities of $55bn-$60bn according to a PBGC estimate.
A related hot issue is whether organisations with non-investment grade ratings on their debt would be required to make extra contributions to their pension plans, if underfunded. The Senate-passed bill includes such a requirement, while the House’s does not. Boehner said he believes “the actual financial status of the pension plan, and not the company’s credit rating, is the most important factor in determining how to ensure the plan gets back on track”.
Another problem is how to phase in the new requirements: the National Association of Manufacturers asked Congress to delay the effective date to January 2008, as “this is a massive undertaking,” a spokesperson says. “It is going to take a lot longer than six months for employers to prepare for these changes”.
However, President Bush has already threatened to veto the bill if it contains special relief for certain industries or companies. Well, Bush does not have to seek a re-election.