The Association of U S West Retirees



Pension Measure Passes in Senate, But Hurdles Loom
By Michael Schroeder, Staff Reporter
The Wall Street Journal
Friday, November 17, 2005

WASHINGTON: The Senate voted 97-2 to approve sweeping pension legislation that would require companies to fully fund their pension plans and would shore up the federal government's pension insurer.

The bill focuses on narrowing the Pension Benefit Guaranty Corp.'s $22.8 billion deficit by requiring most companies to fully fund their pension plans within seven years and increase premiums paid to the federal pension insurer.

The matter now goes to the House, which is expected to pass a similar bill next month.  But the White House says it is concerned that Congress's final bill won't put enough pressure on companies to keep their promises to employees, and has threatened a veto.

The administration said in a statement that it supported passage of the Senate bill, but "believes that the reforms in this legislation remain inadequate with respect to the level of required plan contributions and the premiums that are needed to return the PBGC to solvency and avert a taxpayer bailout."

Battles also are expected on at least two other provisions, including one that would require junk-bond-rated companies to pay more into their pension plans.  The other, approved as an amendment to the Senate bill, would give a special break for struggling airlines, allowing them to take 20 years to fully fund their plans.

Senate action had been stalled by lobbying efforts by businesses to water down the legislation.  Last month, Sens.
Mike DeWine (R., Ohio) and Barbara Mikulski (D., Md.) blocked a full Senate vote over a provision that would have required companies with credit ratings below investment grade, such as General Motors Corp., to automatically follow tougher pension-funding rules.  The hold was recently lifted and the provision has remained in the bill, but Sens. DeWine and Mikulski will likely try to strip it out when the measure goes to a conference committee to iron out differences between the House and Senate bills.

The use of credit ratings is "a blunt instrument that could prompt many firms to drop their pension plans altogether," Sen. Mikulski argued during floor debate yesterday.

The business lobby also has objected to plans to increase premiums paid to the PBGC, created in 1974 as a government insurance program for traditional corporate defined-benefit pension plans that generally pay monthly benefits based on an employee's salary and years of service.  If a company pension plan shuts down without enough money to meet its obligations, the PBGC guarantees up to $45,614 annually for each employee who retires at age 65.

The legislation has been fueled by the PBGC's financial woes as airline and manufacturing companies continue to dump pension plans on the agency.  The PBGC earns returns on its assets and collects about $1.5 billion in premiums a year from the single-employer plans it insures.  But that has fallen far short of its obligations.

The legislation proposes raising, for the first time in more than a decade, the flat-rate fee to $30 per employee annually from $19 per employee.  With 34 million employees covered, the rate increase would raise an additional $374 million annually -- on top of the current $650 million the agency now collects.

But employers have objected most to the proposal to wipe out an exemption that allows about 80% of underfunded company plans to escape paying an additional variable rate of $9 for each $1,000 of their pension-plan deficits.  Eliminating the exemption could raise variable premiums by $2 billion a year or more if companies don't boost contributions to their own pension funds, said Douglas Elliott, president of the Center on Federal Financial Institutions, a nonpartisan think tank in Washington.

While the business lobby isn't happy, it has accepted the bill as an alternative to more-stringent requirements.  In House and Senate budget bills, there are various proposals to raise the flat-rate premium to as much as $46.75 per employee and to charge as much as $1,250 per employee for three years for companies that dump their pension obligations on the PBGC.

In 2004, Congress passed a two-year measure allowing companies to use an averaged corporate-bond rate to replace the 30-year Treasury rate to determine annual payments to their pension plans.  Companies fear that without the broad new pension-funding legislation, the rate for determining pension liabilities would revert Jan. 1 to the Treasury bond rate -- requiring companies to make higher payments.

Write to Michael Schroeder at