[toeslist] Private pensions in US ailing
Riaz K Tayob
By MARY WILLIAMS WALSH
Published: November 19, 2008
Stung by outsize investment losses, some of the nation's biggest
companies are pushing Congress to roll back rules requiring them to put
more money into their pension funds, just two years after President Bush
signed a law meant to strengthen the pension system.
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Ron Edmonds/Associated Press
President Bush signed the Pension Protection Act of 2006 in response to
a string of big corporate bankruptcies and pension failures. It was
meant to make the pension system less risky.
Related
Times Topics: Credit Crisis The Essentials
The total value of company pension funds is thought to have fallen by
more than $250 billion since last winter. With cash now in short supply
for companies, they are asking Congress to excuse them from having to
replenish the required amounts.
Lawmakers from both parties seem receptive to the idea, and there was
talk of adding a pension relief provision to the broad fiscal stimulus
package Congress considered for this week's lame-duck session.
Late Wednesday, several senators announced that they had reached
agreement on a bill that would provide pension relief. Even if it is not
completed this week, some Congressional leaders say they will seek
support for a pension relief bill in January.
"Congress needs to make the funding less volatile," said Representative
Earl Pomeroy, Democrat of North Dakota, who has long been outspoken on
pension issues. "I believe that taking this step will save thousands of
jobs without costing the Treasury anything."
The risk of giving companies a break on their required contributions is
that some troubled companies may go bankrupt anyway, and the federal
government will have to take over their ailing plans. Though the
government insures traditional pensions, its insurance is limited. And
when it takes over a plan, people can lose benefits.
Pension relief for companies would also expose the Pension Benefit
Guaranty Corporation to greater risk. The federal guarantor is already
operating at a deficit.
Companies do not dispute the risks, but they say that when Congress
tightened the pension rules it did not take this year's unprecedented
market turmoil into account. If companies are now required to put new
money into their pension funds, they say, they will not have the cash
needed for business investments and payrolls.
"At a time when companies desperately need cash to keep their businesses
afloat, the new funding rules will require huge, countercyclical
contributions to their pension plans," a group of more than 300
companies, trade associations, consulting firms and labor unions wrote
in a letter sent last week to the senior members of the House and Senate
committees that deal with workplace matters.
On Wednesday four senators announced a measure for consideration by the
full Senate on Thursday that would give companies more time to make up
investment losses and sort out other problems. The bill was backed by
Senators Max Baucus, Democrat of Montana; Charles E. Grassley,
Republican of Iowa; Edward M. Kennedy, Democrat of Massachusetts; and
Michael Enzi, Republican of Wyoming.
The Pension Protection Act of 2006 was enacted in response to a string
of big corporate bankruptcies and pension failures at the beginning of
this decade. Federal law requires companies to put money into their
pension plans on a regular schedule, but the bankruptcies revealed
gaping loopholes that were allowing companies to go for years without
adding money.
The 2006 amendments were intended to close some of the loopholes and
make the pension system less risky. Until this year's market disaster,
most company pension funds had been making great gains.
In 2002, the last low point for most pension funds, America's 500
biggest companies reported an aggregate pension deficit of more than
$200 billion, according to David Zion, an analyst at Credit Suisse who
specializes in decoding pension numbers. Thanks to company contributions
and strong investment gains, the group reported a pension surplus of $60
billion at the end of 2007.
Data including this year's losses will not be available until the next
batch of annual reports, but Mr. Zion estimates that this same group has
lost almost $265 billion since the beginning of the year. Results are
likely to vary from one company to another because pension investment
strategies can vary greatly. But Mr. Zion said he thought that of these
500 pension funds, more than 200 were now less than 80 percent funded,
meaning they have less than 80 cents for every dollar of benefits promised.
The so-called funded ratio matters greatly because the new rules call
for companies to bring their plans up to 100 percent funding in seven
years, starting this year. The phase-in schedule expects them to be at
least 92 percent funded this year, at least 94 percent funded next year
and so on.
Lawmakers wanted to reduce the Pension Benefit Guaranty Corporation's
exposure to the stock market, so they wrote the law to encourage
conservative investing. The law does not specifically ban volatile
pension investments, but if a company suffers losses big enough to throw
it off the seven-year path to full funding, then it no longer gets seven
years it has to achieve 100 percent funding right away.
Some companies have started shifting away from equities, which can swing
widely, but many others have not. Now those with mostly stocks in their
pension funds seem likely to have tripped the penalty switch, by falling
below this year's required 92 percent funded ratio. As a result they
will now have to shoot for 100 percent funding.
The letter said the required contributions for next year are rising
sharply. It cited one unnamed Florida company that contributed $673,000
this year and will be required to put in more than $15 million in 2009.
Many of the companies now calling for relief have sprawling, mature
pension funds with obligations so big they can dominate the companies'
own financial performance. Mr. Zion has identified nine big companies
whose pension obligations are more than five times the size of their
single largest liability on their balance sheets; six have signed the
letter: the NCR Corporation, I.B.M., Rockwell Collins, the ITT
Corporation, Northrop Grumman and the Pactiv Corporation.
The sponsor of America's biggest corporate pension fund, General Motors,
did not sign the letter. But Ford Motor and Chrysler did.
The A.F.L.-C.I.O. has not yet taken a public stand on pension relief,
but consumer advocates are expressing guarded support.
"If they ask for something more than temporary, it's not going to happen
quickly," said Norman Stein, a professor at the University of Alabama
who specializes in pension issues.
The Pension Rights Center, an advocacy group in Washington, said the
financial crisis had clearly shown that defined-benefit pensions were
superior to 401(k) plans, which make participants bear all the market
risk. The center said it would make sense to encourage companies to keep
offering pensions by giving them a break on their contributions but
only if they agreed not to freeze their plans.
In a pension freeze, employees keep the benefits they have earned, but
stop building up new benefits with additional years of work. Even a
frozen pension fund still needs contributions, albeit smaller ones, and
the companies seeking relief include those with both frozen and active
plans.
Companies urging relief that have already frozen one or more of their
pension plans include 3M, Alcoa, DuPont, I.B.M., Nortel, Northrop
Grumman, Verizon and Whirlpool, among others.
The issue would be a flashpoint, Professor Stein predicted. "This is
completely inappropriate for frozen plans," he said. "I can't see any
reason at all to give relief to frozen plans."
http://www.nytimes.com/2008/11/20/business/economy/20pension.html?_r=1&partne
r=rss&emc=rss
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