House Passes Pension Reform, Setting Stage for Tough Talks

By Staff Report

Dec. 19, 2005

When a House-Senate conference committee meets early next year to begin reconciling differences in each body’s pension reform legislation, plenty of controversial issues will arise. Among them are limits on the smoothing of liabilities, the use of credit ratings to determine whether a company must make higher pension payments and how much time airlines should have to shore up pension shortfalls.

But policy on cash-balance pension plans—a topic that didn’t get much attention as the House passed its bill on December 15—may become a major sticking point of negotiations that are expected to last for weeks.

“That is likely to be the most difficult issue in the conference,” Rep. John Boehner, chairman of the House Education and the Workforce Committee, said in an interview after the House approved a bill, 294-132, that would force companies to fund 100 percent of their pension promises.

Pension reform is coming to a head because several large companies have terminated their plans over the past couple years, dumping them on the Pension Benefit Guaranty Corp. and producing a $22.8 billion deficit for the federal insurance agency. The PBGC estimates that pensions are underfunded by $450 billion.

The House was set to put the bill off until next year, but then the United Auto Workers and House Republicans quickly reached an agreement on payment of shutdown benefits. That move helped garner 70 Democratic votes, but many party leaders denounced the legislation as a threat to retirement security. The Senate passed its bill, 97-2, in November.

Both versions of the reform bill declare that cash-balance plans are not age discriminatory, but that applies only to plans established after the bill becomes law, not to those already covering about 8.5 million workers. Business interests will push hard to ensure that the final bill would make cash-balance plans retroactively legal.

Workers have sued several companies for replacing traditional defined-benefit plans with cash-balance plans, claiming they hurt older employees. Traditional plans use a formula based on an employee’s tenure and pay to determine an annuity amount, while a cash-balance plan is a hypothetical individual account generated by a percentage of a worker’s salary and interest credits.

Beyond the cash-balance issue, other controversial areas include limiting the smoothing of liabilities and forcing companies with lower than investment-grade debt to make higher pension payments. Junk-bond-rated General Motors chafes at the latter proposal, asserting that its pension plan is not in danger.

Businesses say the new rules would make pension plans more volatile and costly. “It reduces flexibility and provides less ability to predict what your (pension liability) results will be,” says Jon Waite, lead actuary at SEI Investments, a provider of outsourced pension management services.

Waite estimates that reform proposals could increase pension liability by 3 percent to 20 percent, depending on a plan’s characteristics. A company with a $100 million pension program whose costs increased by 3 percent, for example, would have to pay about $500,000 more per year for each of the seven years that companies would have to amortize their funding gaps.

Boehner is not cowed by a Bush administration threat to veto reform that it deems insufficiently tough. ” There’s not going to be a bill weaker than current law,” he says.

Mark Schoeff Jr.

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