The Senate Finance Committee voted yesterday to give companies a break on their pension requirements, which would save them about $60 billion over the next three years, according to a new government analysis.
America's pension funds now have a total deficit of about $400 billion Ea record Eand unless the rules governing pension financing are eased, many companies will have to start making large contributions to close the gap. The Senate bill would shield companies from having to do that during a slow economy, helping them conserve cash. But it would also weaken the pension funds, the government projections show.
A far more modest pension bill, which would last two years and save companies an estimated $25.5 billion, was introduced yesterday in House committee.
The bills seek a balance between making sure companies keep their pension funds healthy and pushing the companies so hard that they themselves are put in financial jeopardy. There is pressure to come up with a remedy because a previous pension relief measure expires at the end of the year, and without a new one, pension contributions will balloon.
Business groups have complained forcefully that current pension rules are still too demanding, but it has been impossible for Congress or employees to evaluate those arguments because individual companies do not provide current information about the health of their pension plans.
The new analysis, made by the federal agency that insures pensions, the Pension Benefit Guaranty Corporation, is the first study of pension contributions released by the government since pension funds began to deteriorate about four years ago.
The results confirm both concerns about the pension funds. On the one hand, the study shows that pension contributions grew significantly starting in 2000 and will become an even greater burden on companies in the coming years if the rules that govern pension financing remain unchanged. But it also shows that if relief is given to the companies, sick pension funds will get even sicker.
This year, companies are expected to pay $65.5 billion into their pension funds, compared with $6.4 billion in 2000, as contributions covered by stock market gains in the 1990's were wiped out.
Next year, without legislative relief, the companies will have to pay about $125.3 billion, according to the analysis.
If the Senate bill becomes law, companies would still have to pay $103.5 billion next year to keep their pension plans legal.
The agency's study showed that about half of the savings to companies in the Senate bill would come from a provision that would change they calculate the value of their pension promises to employees. For three years, it would allow companies to alter a crucial interest rate used in their calculations; the new rate would make the pension values look smaller. That, in turn, would lead to smaller pension contributions.
The other half of the pension savings would come from a provision to exempt many companies from having to make special, accelerated pension contributions, called deficit-reduction contributions, for the next three years.
Normally, companies make a minimum pension contribution each year, and must make the deficit-reduction contributions only if their pension funds develop significant, lasting deficits.
This requirement was enacted in 1987, after a record-breaking pension default at LTV Steel convinced Congress that the basic financing rules, enacted in 1974, were not enough to halt the decline of a severely underfinanced plan.
Until now, many businesses have been able to avoid making these special contributions because of the lag built into the pension accounting system.
Actuaries customarily spread pension gains and losses over several years, meaning that many plans are only now dealing with the damage caused by the bear market that began in 2000.
The same lag also means the summer's upturn in the stock market will not fully register on pension books until later. Thus, companies now facing the deficit-reduction contribution requirement cannot count on the markets to rescue them.
The pension agency's analysis found that if the Senate bill becomes law, each of the two provisions would save companies about $30 billion over the next three years.
The study also measured the effect of these changes on the solvency of pension plans. It found that if the current rules are left in place, the overall pension deficit of $396 billion would shrink to $267 billion after three years.
If the Senate bill is enacted, the deficit would also shrink, but not as much, the study said, projecting a $328.5 billion shortfall.
Steven Kandarian, executive director for the agency that did the projections, said he feared that by easing the demands on companies, the bill would put pension plans at risk.
"These plans are already underfunded by billions of dollars," he said. "This provision digs the hole even deeper, and weakens important protections that have been built into the system over the last 16 years."
Also contained in the Senate bill is a provision that would strengthen pension funds by requiring companies to pay in more as their workers draw close to retirement.
The pension agency has been calling for such an approach, but the Senate bill would not fully incorporate it for eight years.
The House bill would change only the way companies calculate their pension obligations Eyielding smaller contributions Eand would grant the change for just two years. It would not give any exemptions from the deficit-reduction contributions.