Pension reforms a mixed bag
Young workers, Wall Street likely to benefit most
Abrams, Associated Press
WASHINGTON - Young workers, Wall Street, a couple of airlines and U.S. taxpayers could come out as winners in the pension changes made by Congress.
Some older employees, as well as truck drivers and construction workers hoping to retire early, might not fare as well.
The legislation passed by the Senate late Thursday and sent to the president will, if successful, prod companies to fund their pension plans properly and ensure that workers get the retirement benefits they deserve.
But the bill also reflects the reality that the traditional, defined-benefit pension plan system is in decline, and the transition to new defined-contribution-style savings plans won't be easy.
Both of Colorado's U.S. senators, Democrat Ken Salazar and Republican Wayne Allard, voted "yes" on the pension bill, which passed by a 93-5 vote.
President Bush, in a statement Friday, praised the bill as the "most comprehensive reforms to America's pension system in over 30 years." He said he planned to sign it into law soon.
Here's how some of the major players may be affected:
• Employers: The 30,000 defined-benefit plans run by employers are now underfunded by $450 billion, and the bill requires plans to reach 100 percent funding levels in seven years. Seriously underfunded "at-risk" companies must contribute at an accelerated rate.
The American Benefits Council, which represents companies with traditional pension plans, said the bill was a "mixed bag" that promotes saving but could make funding requirements more unpredictable, giving plan sponsors thinking of freezing their plans another reason for doing so.
The council's vice president, Lynn Dudley, said the bill shifts saving responsibilities onto the individual by promoting 401(k) and other defined-contribution plans. "Defined-benefit plans were sacrificed in the process, and for that we are disappointed."
Frank McArdle, manager of the Washington office of Hewitt Associates, a human resources consulting firm, didn't think the funding rules would of themselves contribute to more ditched plans. "We think in the end companies will figure out a way to work with them."
The Congressional Budget Office concluded that companies actually will contribute less to their plans over the next few years as the new funding rules are phased in but will start making higher contributions in about five years.
Two companies pleased about the legislation are Delta Air Lines and Northwest Airlines Corp., which have filed for bankruptcy and have frozen their defined-benefit pension plans. Delta intends to terminate its pilots' pension plan.
Concerned that the two airlines would dump their plans, underfunded by a total of more than $10 billion, on the government, lawmakers gave them an extra 10 years beyond the seven years that other companies get to catch up.
"Delta will be in a position to preserve its pension plan covering 91,000 active and retired ground and flight attendant employees, thereby preserving their hard-earned benefits and preventing the U.S. pension system from being burdened with additional plan liabilities," Delta CEO Gerald Grinstein said.
Not quite as pleased were American Airlines and Continental Airlines, the only big airlines with active defined-benefit plans. Unless they freeze their plans, entitling them to the full 10-year extension, they will get three years on top of the seven-year payback time. Lawmakers from Texas, where the two airlines are based, said Congress shouldn't give advantages to one company over another. Of the 16 House Republicans who voted against the bill, 15 were from Texas.
General Motors and the UAW came out in support of the bill after an earlier Senate provision was removed. It would have linked GM's low credit rating to pension funding obligations.
• Workers: The bill, while stabilizing a shaky system, does not ensure there will be a defined-benefit plan in a worker's retirement future. Half the workers in private industry have no pensions, and the legislation "doesn't do anything for that," said Karen Friedman of the Pension Rights Center.
A Hewitt Associates survey of 227 employers last year found 29 percent were very or somewhat likely to close participation in defined-benefit plans during the year.
AARP said workers get shortchanged in a provision that adds legal certainty to cash balance plans, "hybrids" currently in legal limbo because of a lawsuit against IBM filed by employees claiming age discrimination. The bill, said AARP's David Sloane, "may lead to discriminatory plan designs that stop or reduce benefits for older workers."
The Teamsters also were protesting "red zone" provisions that would reduce early retirement benefits for workers in seriously underfunded multiemployer plans. Critics say cutting already promised benefits is unprecedented, but UPS and some construction trade unions argue that they need more flexibility to restore health to these joint employer-union plans.
Experts agree that young workers in particular will be big winners from provisions promoting automatic enrollment into 401(k) programs. Research by the Investment Company Institute and the Employee Benefit Research Institute found that 401(k) participation rates among low-income workers would more than double, from 42 percent to 91 percent, under automatic enrollment plans.
The typical worker doesn't start saving through a company retirement plan until age 41, said Peter Orszag, director of the Retirement Security Project. Automatic enrollment "helps close the retirement savings gap." The bill also encourages savings by making permanent a 2001 law allowing for increased annual contribution limits to individual retirement accounts, or IRAs. This would mainly benefit higher-income households.
• Taxpayers: The Pension Benefit Guaranty Corp., the federal agency that insures pension plans, has racked up deficits of $22.8 billion, mainly from taking over defunct steel and airline plans. The PBGC now operates on premiums and interest earnings, but the concern is that a rash of terminations could result in a massive taxpayer bailout.
But most experts discount comparisons to the bailout for the savings and loan industry in the 1980s, noting that PBGC liabilities can be stretched out over 30 or 40 years.
If the legislation just keeps the airline pensions afloat, the -PBGC, and the taxpayer, come out winners.
Major provisions of the bill
• Requires employers with defined-benefit plans to make sufficient contributions to meet a 100 percent funding target and erase funding shortfalls over seven years.
• Forces employers with "at-risk" plans to make accelerated contributions. Under one scenario, a plan is deemed at-risk if it falls below 70 percent funded status using assumptions that employees take the most expensive benefits and retire at the earliest possible date.
• Changes the interest rate model used for measuring a company's pension liabilities.
• Prohibits employers and unions from increasing benefits if a plan is less than 80 percent funded, unless the benefits are paid for immediately.
• Gives taxpayers the option of depositing a portion of their federal tax refund directly into an IRA.
• Restricts the use of deferred executive compensation arrangements for employers with severely underfunded pension plans.
• Gives bankrupt airlines with a "hard freeze" on their plans an additional 10 years to meet funding obligations. A plan sponsor would pay a termination premium of $2,500 per plan once it emerges from bankruptcy. Airlines with a "soft freeze" on their plans would get an extra three years and must also pay the $2,500 premium if they terminate their plan upon entering bankruptcy. The premium would be paid when they emerge from bankruptcy.
• Ends the legal uncertainty surrounding cash balance pension plans and establishes a simple age discrimination standard for all defined-benefit plans.
• Makes permanent provisions in a 2001 tax cut law that raised annual contribution limits for IRAs.
• Bars companies from forcing employees to invest any of their own retirement savings contributions in company stock.
• Permits qualified financial companies to offer face-to-face investment advice to help employees manage 401(k) and other retirement options. Those companies would be required to base recommendations on employer- sponsored plans such as 401(k)s on a certified computer model.
• Allows employers to offer automatic enrollment in employer-sponsored defined contribution pension plans such as 401(k)s.
• Allows employers with defined-benefit pension plans that are more than 120 percent funded to use assets to fund retiree health benefits.