The Association of U S West Retirees



Pension Measure To Enact Changes Over Several Years
By Deborah Solomon
The Wall Street Journal
Saturday, August 5, 2006

WASHINGTON -- The long-awaited pension bill headed for President Bush's desk is expected to strengthen the nation's employer-sponsored pension system.  But the changes won't happen overnight and many companies with funding shortfalls will get years to shore up their plans.

Pension experts say that could make the next few years potentially risky for the 44 million workers in defined-benefit plans and for the federal government's pension insurer, the Pension Benefit Guaranty Corp.  Pension plans are underfunded by about $313 billion and the new rules include long transition periods and special relief for some struggling industries.  The PBGC, which has a $23 billion deficit, has estimated its exposure to "new probable terminations" by companies at $108 billion.

The legislation, which the Senate approved late Thursday, will give most companies seven years to fully fund their pension plans and will require accelerated payments from those whose plans are severely underfunded.  But the rules don't go into effect until 2008, meaning most companies won't be required to have 100% of assets to cover liabilities until 2015.

There are also concessions for airlines, auto makers and other troubled industries that will ease rules on companies that are among the biggest users of defined-benefit plans and ones that have shortfalls.

"There's no mistaking the major compromises and gaps in the act," Richard Berner, chief U.S. economist at Morgan Stanley, wrote in a report Friday.  "The delayed start (in 2008) and long phase-in of tougher rules ... reduce the proposals' effectiveness."

The legislation, a product of months of negotiations between the House and Senate, is aimed at strengthening the pension system by getting companies to stop making promises to employees that they can't keep.  It also seeks to shore up the PBGC by requiring that companies pay higher premiums to the agency if their plans have shortfalls and to pay a fee -- $1,250 per plan participant -- if they file for bankruptcy protection and dump their pensions on the insurer.

The bill also requires companies whose assets fall below 80% of liabilities to freeze benefits, and it changes the way all companies calculate their obligations.  In addition, it provides an incentive for companies to put more money into their pension funds by raising the cap on the tax-deductible contributions.

But after heavy lobbying by airlines and manufacturers among others, lawmakers eased some of the toughest rules.  For instance, auto companies won a concession allowing them to calculate their liabilities in such a way that many will avoid falling into the "at-risk" category.  Companies deemed to be at-risk have to make additional payments to their pension plans.

To avoid that designation, companies must be at least 80%-funded using standard assumptions and at least 70%-funded assuming a worst-case scenario -- in which employees take the most possible benefits and retire at the earliest or most costly time.  But the legislation provides an exemption for auto companies that offered early retirement to employees in 2006.  Employees who turned down the early-retirement offer and still work at the company won't have to be included in the worst-case scenario assumptions, even though those workers could eventually take early retirement.

The at-risk rules will also be phased in over four years for all companies so that very few businesses will actually be deemed at-risk for the first few years.  And the at-risk determination won't take into consideration the financial strength of a company, as the Bush administration had originally wanted.

"The bottom line is it's probably a toss-up whether the PBGC will be better off," said James Keightley, a former general counsel for the PBGC and a partner at Keightley & Asher LLP.

Airlines also got more time to get their plans fully funded.  Northwest Airlines and Delta Air Lines will get 17 years and will be allowed to use a more favorable rate to calculate what they owe.  Continental Airlines and AMR Corp.'s American Airlines will get 10 years to fully fund their plans and may get further concessions in the fall.

White House officials say the transition time will help companies meet their obligations without financial pain.  "You have to have a balance," said Stephen S. McMillin, deputy director of the Office of Management and Budget.  "If you push some of these companies too hard too fast you're going to be pushing them into a situation where, instead of protecting the worker from the theoretical risk 10 or 20 years down the line, you've created an actual harm to them in the first few years."

Write to Deborah Solomon at