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The Association of U S West Retirees
 

 

 

Congress Closes In On Overhaul Bill For Pension Plans
By Deborah Solomon
The Wall Street Journal
Saturday, July 22, 2006


WASHINGTON -- Congress is completing work on a sweeping pension bill that would overhaul the nation's employer-sponsored retirement plans.

The legislation would tighten funding rules for corporations that offer defined-benefit plans, pave the way for employers to move away from such plans and ratchet up funding for the agency that insures pensions.

The result would be a mixed bag for the 44.1 million people in defined-benefit plans, some of whom might see their benefits frozen or trimmed, or find themselves moved into other types of retirement plans.  At the same time, the legislation is designed to protect workers from losing their pensions altogether by requiring that companies fully fund their obligations and erase the $313 billion gap in funding that currently exists.

Details are still being worked out, and the bill likely won't be unveiled until early in the coming week.  But Congress is expected to give most companies seven years to fully fund their pension plans -- while some struggling airlines would get 20 years to comply.  Companies deemed to be "at-risk" of abandoning their plans would have to make additional contributions in order to get to 100% funding within seven years.

The measure would tighten rules governing how companies assess their ability to meet their obligations, and employers would be given legal authority to move workers into cash-balance plans -- pensions that mimic some aspects of 401(k) plans, which are measured by contributions rather than promised payouts.  This can work against older workers, who generally have accrued hefty benefits and have less time to make up for their loss.

Both business groups and employee advocates say the changes are likely to curtail employee benefits and prompt employers to continue the trend of moving away from traditional defined-benefit plans.

In large part, the changes are meant to dissuade companies from dumping their pension plans on the Pension Benefit Guaranty Corp., the federal agency that insures pensions.  The PBGC assumes the pension obligations of companies that have filed for bankruptcy protection, though the amounts are often much lower than what workers had been promised.  The PBGC, currently responsible for the pensions of nearly 1.3 million people, is running a $22.8 billion deficit.

The bill is a compromise between versions passed last year by the House and Senate.  The PBGC said either of those would actually result in lower corporate contributions over the next few years and could lead to more companies defaulting.

As part of the House-Senate compromise, lawmakers would impose stricter rules on how companies determine how well-funded their plans are and require that they freeze benefits when funding falls below a certain threshold.  The aim is to stop companies from promising benefits that they might not be able to keep.

For employers, the biggest pinch would be felt by those deemed to be at-risk, which would require them to make additional payments into their pension plans.  To avoid this designation, companies would either have to be at least 80%-funded using standard assumptions or at least 70%-funded assuming a worst-case scenario -- in which employees take the most possible benefits and retire at the earliest or most costly time.  That could boost some companies' liabilities by billions of dollars.  And companies couldn't count credit balances they had earned in the past when they contributed more than required into their pension funds.

The tougher standard is "going to put a lot more companies in the at-risk rules," said Bob Shepler, director of corporate finance and tax at the National Association of Manufacturers.  He said the change would likely force manufacturers, which often take advantage of credit balances, to offer less-generous benefits.

At the same time, the legislation is expected to allow companies to convert workers to cash-balance plans without fear of triggering age-discrimination rules.  Some employee advocates say that would lead to discrimination against older workers.  "Without any debate, they're changing accrual rules that have been in place for 30 years -- not only for cash-balance plans but for all other pension plans," said Karen Friedman, policy director at the Pension Rights Center.  "The legislation is a Pandora's Box."

---- Theo Francis and Ellen E. Schultz in New York contributed to this article.

Write to Deborah Solomon at deborah.solomon@wsj.com

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