MINNEAPOLIS (AFX) - The idea that struggling airlines needed pension help spurred Congress to overhaul retirement laws this week. But outside the airline industry, the changes could accelerate corporate America's shift away from traditional pensions, experts said Friday.
The bill, expected to get President Bush's signature, tightens funding requirements for companies that are behind on their contributions to traditional, defined-benefit pension plans. Now they'll have to make up the shortfall within seven years. Those with 'at-risk' plans will have to accelerate their contributions.
Airlines, such as bankrupt Delta Air Lines Inc. and Northwest Airlines Corp., can take 17 years if they freeze their pension plans. Delta has said it intends to terminate its pilot pension but hopes to keep a plan covering 91,000 active and retired ground workers and flight attendants.
The bill could make companies even more eager to move to defined-contribution plans such as 401(k)s.
The new funding rules 'will inject a lot of unpredictability, and therefore I think accelerate the move away from defined benefit plans,' said James Klein, president of the American Benefits Council, which represents companies with traditional defined-benefit plans.
For instance, the bill measures whether plans are underfunded in part based on the interest rate on corporate bonds instead of the 30-year Treasury rate. That could make the measurements more volatile, Klein said, leaving companies unable to predict their future obligations.
'Very modest changes in interest rates can have more jarring effects either up or down,' Klein said.
'Businesses and volatility don't like one another,' he said. 'For something that is as long-term as a pension plan, stability and predictability are essential.'
Businesses have already been shifting away from traditional pensions. The number of such plans peaked at about 115,000 in 1985, but had dropped to about 29,000 in 2004. Companies have increasingly looked to get away from promising retirement benefits today that they will have to pay decades from now.
Instead, they've shifted to plans such as 401(k)s where employees put in their own money, often with a match from the employer. In plans like that, once the company pays its match, its obligation is finished.
The new pension law could increase the difference between the certainty of a limited 401(k) match and the uncertainty of a pension obligation due decades down the road.
But while the new law pushes companies to fully fund their plans, tax laws penalize companies who over-fund their plans, said Michael B. Preston, a pension actuary who has spoken on the issue for the American Society of Pension Professionals and Actuaries.
Companies that terminate an overfunded plan can lose nearly all of the leftover money to state and federal taxes, including a 50 percent excise tax, he said. And it's not just bankrupt companies that terminate plans. Plans are often ended when companies merge and put all their employees into a single plan, he said.
New accounting rules mean that extra money is right on the balance sheet, looking like a corporate asset. He said it drives chief financial officers crazy.
'CFOs these days, with transparency issues, the last thing they want to do is say to their shareholders, 'We have an extra $40 million in the pension plan above what the liabilities are, and our interest in that if we were to terminate the plan is about 37 cents.''
It's not clear, though, how much the tougher new laws will actually improve the funding of the nation's pensions, said Marc Levinson, an economist at JPMorgan Chase who has studied pension issues. The only way to strengthen pension plans is to make companies put more cash in -- but that doesn't mean they have the money.
'These companies are actually going to have to put up a fair amount more cash, in some cases, and they may not have it,' he said.
He predicted that larger companies that find the funding requirements tough to meet will get the government to make exceptions, while the same option may not be available for smaller companies.
'The federal government is not going to close down General Motors because it did not make the required pension contribution,' he said. 'Washington is going to find ways around imposing onerous costs on big and politically powerful companies.'
Joshua Freed can be reached at jfreed(at)ap.org
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