Major Changes Raise Concerns on Pension Bill
By Mary Williams Walsh
New York Times
Sunday, March 19, 2006
With a strong directive from the Bush administration, Congress
set out more than a year ago to fashion legislation that would
protect America's private pension system, tightening the rules
to make sure companies set aside enough money to make good on
their promises to employees.
Then the political horse-trading began, with lawmakers,
companies and lobbyists, representing everything from big Wall
Street firms to tiny rural electric cooperatives, weighing in on
the particulars of the Bush administration's blueprint.
In the end, lawmakers modified many of the proposed rules,
allowing companies more time to cover pension shortfalls, to
make more forgiving estimates about how much they will owe
workers in the future, and even sometimes to assume that their
workers will die younger than the rest of the population.
On top of those changes, companies also persuaded lawmakers to
add dozens of specific measures, including a multibillion-dollar
escape clause for the nation's airlines and a special exemption
for the makers of Smithfield Farms hams.
As a result, the bill now being completed in a House-Senate
conference committee, rather than strengthening the pension
system, would actually weaken it, according to a little-noticed
analysis by the government's pension agency. The agency's
report projects that the House and Senate bills would lower
corporate contributions to the already underfinanced pension
system by $140 billion to $160 billion in the next three years.
That shortfall raises the specter of more pension plans failing,
pushing their liabilities on to the government, according to the
agency and critics of the bills. And some companies with fully
financed pensions feel unfairly penalized by having to pay
higher pension premiums to make up for others' shortfalls.
"It takes a better economist than me to understand how reducing
contributions by that much is going to protect benefits and put
the system on a sounder footing," said Jeremy I. Bulow, an
economist at Stanford University.
Both pieces of legislation — one passed by the House and the
other by the Senate, both by overwhelming majorities — do
contain measures that would reduce some of the lapses and
inaccuracies that the current pension law permits. They would
also increase the premiums that companies pay to the federal
guarantor, the Pension Benefit Guaranty Corporation, an agency
grappling with a $23 billion deficit.
Senator Charles E. Grassley, Republican of Iowa and chairman of
the Senate Finance Committee, says the bills attempt to strike
the proper balance between providing for workers' pensions and
allowing companies to remain competitive.
"My goal is to make sure that companies set aside enough money
for the pensions they promise their workers," Mr. Grassley
said. "At the same time, we can't put burdens on plan sponsors
that are too heavy."
The overhaul of the pension system is being undertaken at a time
when it is reeling from a series of big bankruptcies, like those
of United Airlines and Bethlehem Steel, which sent billions of
dollars' worth of obligations to the pension agency.
The agency's pension insurance is limited, and a growing number
of these companies' employees have discovered to their dismay
that their benefits exceed the limits and that they will simply
lose part of the money they had been promised.
The House-Senate conference committee intends to reconcile the
bills before April 15, when the next round of corporate pension
contributions are due. But the White House already warned in
November that President Bush might veto any bill that extended
too much special pension relief to individual companies and
Legislators argue that, while they want the pension agency to be
strong, they also want to encourage companies to continue
offering pensions. Lately, some companies, like I.B.M and
Verizon, have moved to freeze their pension plans, arguing that
the costs of their plans make it hard to compete.
Kevin Smith, the spokesman for Representative John A. Boehner,
Republican of Ohio and the new House majority leader, who was
one of the driving forces behind pension changes, defended the
House bill, arguing that many specific measures, particularly
those phasing in the new rules slowly, were necessary.
"Both the House and Senate pension bills represent the most
comprehensive pension reforms in a generation," Mr. Smith said,
"so a responsible transition period for employers to meet the
new, stricter rules is appropriate."
He added that he believed the pension agency's analysis did not
take into account the weakened financial condition of many
companies that offer pensions.
The law that Congress wants to amend was enacted in 1974 after a
series of scandals in the auto industry in which employees of
dying companies like Studebaker and Packard discovered that
little or nothing had been set aside for their pensions. It
gave rise to rules for the financing of pensions and to an
insurance program roughly comparable to the federal insurance
program for bank deposits.
The law did help safeguard pension benefits, but it has not been
strong enough to stop some companies from falling short in their
When Labor Secretary Elaine L. Chao sent Congress a blueprint
for amending the pension law in January 2005, many companies
thought her proposals were too tough.
From the start of the legislative process, lobbyists
representing a wide swath of American business, including those
from the United State Chamber of Commerce, the American Benefits
Council and the Erisa Industry Committee (which represents large
companies with pension plans), argued for easing the burden on
companies by allowing them more latitude in estimating how long
their workers would live, for example, and what they would need
to set aside for future payouts.
The biggest single-industry pension break in the bill passed by
the Senate is for the airlines, to allow them to keep their
unstable pension plans going.
Among other things, the airlines would be given 20 years to
close the shortfalls in their pension funds -- nearly three
times as long as other companies. They would also be allowed to
factor in highly optimistic assumptions about their investment
returns when calculating how much they needed to contribute to
their pension funds each year.
The measures were written into the bill at the request of
Northwest Airlines, which is in bankruptcy proceedings and is
trying to keep its pensions alive, though in sharply reduced
form. Northwest sought a 14-year breather on its pension
But then Senator Johnny Isakson, Republican of Georgia, said
that 14 years of relief would not be enough to help Delta, a big
airline based in his state, which is also operating under
Chapter 11 bankruptcy protections. Senator Isakson amended the
bill to provide 20 years of relief. After complaints from other
big airlines, the relief was expanded to them all.
The Senate bill would also help recover more than $1 billion of
benefits that thousands of pilots for Braniff, PanAm, Eastern,
United and other airlines have lost in bankruptcy cases going
back as far as the 1980's. That amendment was made by Senator
Daniel H. Akaka, Democrat of Hawaii.
But helping those pilots would be expensive: the pension agency
projected that the entire provision would increase its total
obligations to retirees by more than $1 billion.
Someone must pay for this. Currently, the pension agency
finances itself in part through the insurance premiums that
companies are required to pay into the system. Raising the
premiums to support pilots or help other victims of corporate
bankruptcies, some companies in other industries are starting to
say, would be unfair.
In a letter to shareholders last week, Edward S. Lampert,
chairman of Sears Holdings, which is responsible for the pension
plans of employees at Kmart and Sears, complained that his
company's pension insurance premiums were going up by 60
percent, "not in order to address any risk associated with
Sears, but rather to make up for the difficulties of other
Mr. Lampert also deplored the current pension law, which bars
companies with richly financed pension plans from taking any of
the surplus money out, except in rare instances.
Prudential Financial has the same complain, but instead of
writing to its shareholders, it took direction action in
Washington, hiring William F. Sweetnam Jr., until recently the
Treasury Department's senior legal adviser on employee benefits,
to lobby on the issue of surplus pension assets. Mr. Sweetnam
is now a principal at the Groom Law Group, a Washington law firm
that specializes in employee benefits issues.
Prudential has a $1.2 billion surplus in its pension fund. Mr.
Sweetnam was able to persuade several senators, including Frank
R. Lautenberg, Democrat of New Jersey (where Prudential has its
headquarters), that the companies that are more than 15 percent
overfinanced should be allowed to remove some of the surplus and
use the money to buy health insurance for retirees.
Currently, only companies that are 25 percent overfinanced are
allowed to do so.
Robert DeFillippo, a Prudential spokesman, said that the
provision would improve pension security because in exchange for
the ability to take more money out of the pension fund, the
company would be required to handle the money remaining in the
fund much more carefully.
Smithfield Farms also got help in the name of strengthening the
system. It bought another meat company out of bankruptcy in
2003, taking over its pension fund at the same time. That kept
the bankrupt firm's pension plan alive, Smithfield said, and
saved the government from having to take it over. In light of
that, the company contends that it would hardly be fair to
impose tougher new financing rules on Smithfield.
That argument caught the ear of Senator Mike DeWine, Republican
of Ohio, where Smithfield has major operations. Mr. DeWine
added a provision that would let Smithfield follow the old
pension rules until 2014, no matter what Congress does in the
The bills would also be a boon to Wall Street by permitting
financial service companies to handle more retirement money with
fewer restrictions. Hedge funds, for example, would be
permitted to manage more pension money without being held to the
pension law's exacting standards of fiduciary duty.
Mr. Boehner has championed easing the restrictions on investment
advice for several years. He included a provision that would
permit investment firms to advise participants in 401(k)
retirement plans, even if the firms' own mutual funds were among
the employees' investment choices. Current pension law forbids
this practice, on the thinking that it could taint investment
Mr. Boehner has argued that employees need more investment
advice, however, so that they can save more and earn better
returns on their money. The securities industry is his top
campaign contributor, providing more than $125,000 already in
the 2005-06 House election cycle.
Mr. Smith, the spokesman for Mr. Boehner, said that the House
bill would provide better quality financial advice for workers,
adding that the Bush administration strongly supported that
"The Senate advice provision does little more than restate
current law," he said, "which has left workers to fend for
themselves without the type of quality advice they so