Posted on: Sunday, December 7, 2003
Congress may not resolve pension reform this year
By Rachel Beck
Associated Press
NEW YORK — Corporate pension legislation now before Congress may be a lose-lose scenario.
Big losses in stocks during the bear market combined with low interest rates have left many companies with hefty funding gaps to fill in their pension plans. The government's proposed measures would stem those costs, at least for the immediate future.
Should this go through, taxpayers along with perfectly healthy companies could get stuck footing at least some of the bill. But if companies don't get a reprieve, they would have to come up with the needed cash, and that could take a bite out of their earnings, sending stock prices tumbling and cutting into dividends.
A pension plan is considered underfunded when its obligations — what it owes to retirees — exceed its assets by at least 10 percent. At that point, companies must cover the difference.
Pension plans of companies in the Standard & Poor's 500 index went from being overfunded by $250 billion in 1999 to being underfunded by $225 billion at the end of last year, according to Credit Suisse First Boston. And now, even with the stock market rebounding, CSFB expects plans to be underfunded by $247 billion by the end of the year.
But filling that gap isn't so easy. It means coming up with cash at a time when many companies are just starting to see signs of recovery after three years of steep declines.
The House has approved a measure allowing for a two-year interest-rate adjustment that would let businesses pay less into their workers' retirement plans. In addition, airlines, which have been among the hardest hit by the pension crisis, would be allowed to pay for the next two years only 20 percent of what they are currently required to contribute.
The Senate, however, remains divided over whether companies should even get funding breaks. Its measure would give all underfunded companies, not just airlines, a reprieve. This wrangling delayed passage of the bill before the Thanksgiving break, and now it's questionable whether it will come to some resolution by year's end.
If companies aren't relieved of their obligations, they could be left scrambling to cover their shortfalls, and in some cases that could even put a business in jeopardy.
United Airlines' parent, UAL Corp., has gone so far as to say in regulatory filings with the Securities and Exchange Commission that without legislative relief, it would have to contribute some $4.8 billion to its pension plans over the next five years. That could pose a major stumbling block as it tries to emerge from bankruptcy protection.
"The whole discussion here is how much relief do you want to give plans. If plans are just in a temporary hole, then you want to give them the time to work out of that, but you don't want to give excessive relief that would undermine the long-term security of the system," said Howard Blohm, vice president at the retirement services provider Diversified Investment Advisors in Purchase, N.Y.
And that's just what critics say this pension relief would do.
Most importantly, companies are responsible for the total amount they owe, whether it is now or later. For instance, a company that is underfunded by $100 million will only have to put in $20 million, but it will eventually have to make up the other $80 million.
That means if these businesses fail during the reprieve or after it ends, it would put an additional financial burden on the already strapped Pension Benefit Guaranty Corp., the government agency that insures pension plans.
It could also hurt financially stable companies with better-funded pension plans since the PBGC is financed by premiums added on to pension plans. And depleting the PBGC's reserves would likely result in a taxpayer bailout.
The Senate is expected to reopen discussion of this issue when its session resumes Tuesday. Regardless of how this turns out, it's clear someone is bound to lose out.
