December negotiations over pension reform
legislation will determine whether the Bush administration
gets the new funding rules it is seeking. But if no bill
passes, pensions will still be more costly for employers in
2006.
In mid-November, the Senate passed, by a 97-2
vote, a measure that would force companies to fully fund their
pension promises by 2010, limit so-called smoothing of assets
and liabilities to one year and require extra "at risk"
pension payments by companies with junk-bond status whose
plans are less than 93 percent funded. It also would allow
airlines 20 years to reach full funding.
Earlier in the
month, the House Ways and Means Committee approved its version
of reform: a bill that would allow three years of smoothing,
would define a company as "at risk" if its pension plan is
less than 60 percent funded and would enforce full funding
beginning in 2012. It has no airline provision. The full House
is expected to vote on the bill during the week of December
5.
If no bill is approved by January 1, pension costs
will increase as companies begin determining liabilities with
the 30-year Treasury bond rate instead of the higher temporary
corporate bond rate.
Both the House and Senate bills
would raise premiums companies pay to the Pension Benefit
Guaranty Corp. from $19 to $30 per participant. In a November
report, the PBGC said that it had a deficit of $22.8 billion,
down from $23.3 billion in fiscal year 2004.
Business
lobbyists responded quickly, asserting that the figure showed
the agency's situation is not as dire as the administration
claims.
But the PBGC also says that unspecified events
occurring after September 30, the end of the fiscal year,
would have raised its deficit to $25.7 billion. PBGC found
that total underfunding for pension plans was $450 billion.
As House and Senate members meet to reconcile the
pension bills, the White House is threatening to veto the
final measure if it is not tough enough.
The Senate
voted on pension reform only after Sens. Mike DeWine, R-Ohio,
and Barbara Mikulski, D-Maryland, released their hold on the
bill. Senate leaders promised that the two holdouts' concerns
about smoothing and credit ratings could be raised in the
conference with the House.
"We think we got people's
attention," DeWine said in an interview after the Senate vote.
"We think we've got a good shot at this at conference, but
there's no guarantee."
DeWine, who will be a conferee
along with Mikulski, said that auto manufacturers and unions
in his state have been "very vocal" about pension reform.
Under the Senate bill, a company like General Motors
would have to make higher pension payments because it has
junk-bond status--even though it says that its pension fund is
healthy.
Business lobbyists argue that the Senate
approach will make ailing firms sicker, increase funding
volatility by limiting smoothing and ultimately force
defined-benefit plans to shut down.
"For some
companies, these changes are going to be dramatic," says Kent
Mason, a partner at Washington law firm Davis & Harman.