Measure Passes in Senate, But Hurdles Loom
By Michael Schroeder,
The Wall Street Journal
Friday, November 17, 2005
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
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
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
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 email@example.com