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
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
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