WASHINGTON -- The Bush administration is working on a new plan to help businesses address massive shortfalls in their pension funds, but some companies worry the still-developing proposal could make their problems worse in the long run.
The proposal, which follows on a previous administration plan that was rejected by corporate and congressional leaders earlier this year, underscores the urgency of the current pension-funding problem for both businesses and the federal government, which could wind up getting stuck with the bill if lots of pension plans go bust.
The administration is expected to endorse short-term moves for businesses that would relieve some of the huge contribution requirements that many are currently facing. That relief is expected to last for at least two years. After that, the administration was expected to back tougher, long-term pension contribution rules, after a transition period of perhaps five years. Those long-term rules could actually disadvantage companies in mature industries with lots of older workers, some analysts said.
It''s a very, very significant change in the rules, one that could contribute to employers dropping their traditional defined-benefit pension plans, said James Delaplane, a benefits lawyer with Davis & Harman LLP in Washington.
Currently, companies that offer defined-benefit plans must make contributions to these based on their estimated future liabilities to their workers. Contribution requirements can be volatile from year to year, depending on such factors as investment performance and interest rates. These requirements have led many companies to drop their traditional pension plans and switch to defined-contribution plans like the ubiquitous 401(k) plan. According to the Employee Benefits Research Institute, a nonprofit research group in Washington, about 23 million U.S. private-sector workers were covered by defined-benefit plans in 1998, the most recent data available.
In recent years, investment declines plus low interest rates have combined to produce record underfunding of defined-benefit plans. The federal Pension Benefit Guaranty Corp., a quasipublic insurer that assumes some of the obligations of failed plans, estimates that employer-sponsored pension plans are currently underfunded by a total of $300 billion.
The changes the administration is expected to propose would address interest rates. Current interest rates are used to determine how fast a pension fund will grow, and thus how much money a company needs to have on hand to pay its pension obligations in the future. Lower interest rates mean a company must have more money on hand.
That''s a big reason why many companies are being forced to make huge cash contributions to their pension plans. General Motors Corp. (GM) recently issued $17 billion worth of bonds and other securities, mainly to shore up its pension trusts. GM, the world''s biggest auto maker, has the biggest pension funding gap of any U.S. company, according to current accounting rules. GM reported its pension trusts were underfunded by $19.3 billion at the end of 2002.
GM has detailed in filings with the Securities and Exchange Commission how sensitive its pension funding status is to changes in assumptions about interest rates or market returns. A 25-basis-point decrease in the anticipated return on assets would increase GM''s pretax pension expense by $170 million this year, GM said. A 25-basis-point increase in the discount rate applied to GM''s pension obligations would reduce that assumed debt to retirees by $1.8 billion. But any change that would penalize companies for carrying older work forces would almost certainly work to GM''s disadvantage. The auto maker''s U.S. blue collar work force has an average age close to 50 years old.
Airlines also are facing significant worries. AMR Corp.(NYSE:AMR) (AMR), the parent of American Airlines, carries unfunded pension and retiree medical obligations of $ 6 billion, on top of $22 billion of debt and leases, according to Standard & Poor''s. The world''s largest airline, which narrowly averted a bankruptcy filing in April when unions agreed to huge voluntary pay cuts and productivity changes, could benefit at a crucial time if a change in rules reduced its current unfunded pension liability.
To reduce their funding problems, businesses are lobbying for a less-rigorous formula for determining their contributions.
Traditionally, the formula has been based on the 30-year Treasury bond. Business groups want to switch to an index based on high-grade corporate bonds, which pay higher interest than Treasury bonds.
But some government officials are worried that cutting businesses too much slack in calculating their pension-plan contributions could come back to haunt the government. Pension plans that become insolvent usually wind up being taken over by the Pension Benefit Guaranty Corp. It''s funded by contributions from healthy pension plans. But if enough plans go bust, Treasury officials worry that taxpayers ultimately will be put on the hook.
In late April, the Bush Treasury Department recommended a temporary approach that would have left the current funding rules more or less intact for the next two years while the government considers a longer-term solution. Monday, Treasury officials were preparing to roll out a second proposal. It was expected to be presented to congressional leaders as early as this week. Washington pension experts said that in the short run, the administration was expected to propose a shift to something like the corporate bond rate that companies want.
The administration also was expected to propose a long-term solution that would continue using corporate bond rates, but would attempt to match companies'' growth rate assumptions with their workforce demographics. Companies that have older workforces would have to assume shorter-term - and therefore lower - growth rates. They would therefore face higher contribution requirements than companies with younger work forces. That was expected to be a source of friction in Congress.
The proposal, which follows on a previous administration plan that was rejected by corporate and congressional leaders earlier this year, underscores the urgency of the current pension-funding problem for both businesses and the federal government, which could wind up getting stuck with the bill if lots of pension plans go bust.
The administration is expected to endorse short-term moves for businesses that would relieve some of the huge contribution requirements that many are currently facing. That relief is expected to last for at least two years. After that, the administration was expected to back tougher, long-term pension contribution rules, after a transition period of perhaps five years. Those long-term rules could actually disadvantage companies in mature industries with lots of older workers, some analysts said.
It''s a very, very significant change in the rules, one that could contribute to employers dropping their traditional defined-benefit pension plans, said James Delaplane, a benefits lawyer with Davis & Harman LLP in Washington.
Currently, companies that offer defined-benefit plans must make contributions to these based on their estimated future liabilities to their workers. Contribution requirements can be volatile from year to year, depending on such factors as investment performance and interest rates. These requirements have led many companies to drop their traditional pension plans and switch to defined-contribution plans like the ubiquitous 401(k) plan. According to the Employee Benefits Research Institute, a nonprofit research group in Washington, about 23 million U.S. private-sector workers were covered by defined-benefit plans in 1998, the most recent data available.
In recent years, investment declines plus low interest rates have combined to produce record underfunding of defined-benefit plans. The federal Pension Benefit Guaranty Corp., a quasipublic insurer that assumes some of the obligations of failed plans, estimates that employer-sponsored pension plans are currently underfunded by a total of $300 billion.
The changes the administration is expected to propose would address interest rates. Current interest rates are used to determine how fast a pension fund will grow, and thus how much money a company needs to have on hand to pay its pension obligations in the future. Lower interest rates mean a company must have more money on hand.
That''s a big reason why many companies are being forced to make huge cash contributions to their pension plans. General Motors Corp. (GM) recently issued $17 billion worth of bonds and other securities, mainly to shore up its pension trusts. GM, the world''s biggest auto maker, has the biggest pension funding gap of any U.S. company, according to current accounting rules. GM reported its pension trusts were underfunded by $19.3 billion at the end of 2002.
GM has detailed in filings with the Securities and Exchange Commission how sensitive its pension funding status is to changes in assumptions about interest rates or market returns. A 25-basis-point decrease in the anticipated return on assets would increase GM''s pretax pension expense by $170 million this year, GM said. A 25-basis-point increase in the discount rate applied to GM''s pension obligations would reduce that assumed debt to retirees by $1.8 billion. But any change that would penalize companies for carrying older work forces would almost certainly work to GM''s disadvantage. The auto maker''s U.S. blue collar work force has an average age close to 50 years old.
Airlines also are facing significant worries. AMR Corp.(NYSE:AMR) (AMR), the parent of American Airlines, carries unfunded pension and retiree medical obligations of $ 6 billion, on top of $22 billion of debt and leases, according to Standard & Poor''s. The world''s largest airline, which narrowly averted a bankruptcy filing in April when unions agreed to huge voluntary pay cuts and productivity changes, could benefit at a crucial time if a change in rules reduced its current unfunded pension liability.
To reduce their funding problems, businesses are lobbying for a less-rigorous formula for determining their contributions.
Traditionally, the formula has been based on the 30-year Treasury bond. Business groups want to switch to an index based on high-grade corporate bonds, which pay higher interest than Treasury bonds.
But some government officials are worried that cutting businesses too much slack in calculating their pension-plan contributions could come back to haunt the government. Pension plans that become insolvent usually wind up being taken over by the Pension Benefit Guaranty Corp. It''s funded by contributions from healthy pension plans. But if enough plans go bust, Treasury officials worry that taxpayers ultimately will be put on the hook.
In late April, the Bush Treasury Department recommended a temporary approach that would have left the current funding rules more or less intact for the next two years while the government considers a longer-term solution. Monday, Treasury officials were preparing to roll out a second proposal. It was expected to be presented to congressional leaders as early as this week. Washington pension experts said that in the short run, the administration was expected to propose a shift to something like the corporate bond rate that companies want.
The administration also was expected to propose a long-term solution that would continue using corporate bond rates, but would attempt to match companies'' growth rate assumptions with their workforce demographics. Companies that have older workforces would have to assume shorter-term - and therefore lower - growth rates. They would therefore face higher contribution requirements than companies with younger work forces. That was expected to be a source of friction in Congress.
