If the uncertainty over jobs and the economy were not enough, many
Americans now must worry about the solvency of their pensions. But
Congress will consider comprehensive legislation that will amend pension
law -- a move that would affect utilities whose pension promises exceed
the assets they have set aside to pay for them.
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Ken
Silverstein
EnergyBiz Insider
Editor-in-Chief |
The Bush administration would like to enforce stricter funding
requirements so as to avoid any scenario akin to the savings and loan
crisis of the 1980s. As such, Congress is now considering a bill to
ensure employers properly fund their plans and provide workers with
meaningful disclosure about the status of their retirement plans. It
also seeks to protect the interests of taxpayers who could otherwise be
forced to fund a multi-billion dollar bailout of the Pension Benefit
Guaranty Corporation (PBGC) should its financial condition continue to
deteriorate.
"This bill brings a new ability and new flexibility to defined
benefit plans which will allow prudent, well-managed companies the
ability to continue or return to relying on the defined benefit plan as
the core of their retirement benefit strategy, differentiating
themselves competitively in a positive manner to a labor force eager to
gain and retain financial security," says Bart Pushaw, with the
actuarial firm Milliman.
The bill has been introduced by House Education & the Workforce
Committee Chairman John Boehner, R-Ohio and House Ways & Means Committee
Chairman Bill Thomas, R-Calif. It has passed the workforce committee and
is expected to be taken up by the Ways and Means Committee this fall.
The Senate is considering similar legislation.
At issue are defined benefit plans that are promised to retirees and
are calculated using various assumptions such as age, salary, mortality
-- and equity growth. Therein lay the dilemma: When the stock market
surged throughout most of the 1990s, companies could make minimum
contributions to their pensions. But, in the last few years, those
returns as well as interest rates generally, nosedived and triggered new
funding requirements.
In all, the PBGC, which insures most defined benefit plans, said that
the level of underfunding in such plans is nearly $354 billion. Almost
300 pension plans since 1975 have relied on the insurer to pay out
claims. It now says it faces another $96 billion in potential
liabilities from businesses that might terminate their defined benefit
plans. About a third of those potential losses come from the airline,
telecom and utility sectors.
If lawmakers are unable to agree on a solution, the likelihood of
other conglomerates such as United Airlines filing for bankruptcy and
then turning over their pension plan obligations to the federal
government would only increase. In the utility world, Entergy New
Orleans has filed for bankruptcy because of losses it has incurred from
Hurricane Katrina, although it says it wants to mitigate any
repercussions to its parent corporation.
Pending Legislation
Clearly, companies don't have to offer defined benefit plans. With
cash flow at a premium, companies are cutting those pension obligations.
Many, for example, are eschewing their defined benefit plans in favor of
those that place the risks on plan participants. In fact, the number of
defined benefit plans numbered 112,000 in 1985 but last year totaled
about 30,000, covering 17 million workers. Many of those plans were
converted to so-called defined contribution plans, or 401(k) pensions.
Any new public policy must walk a fine line: Employers don't want to
be saddled with cumbersome rules and onerous financial obligations. At
the same time, pension plan participants need to know that their
employers are making timely contributions that are adequate to fund
their retirement accounts.
The so called Pension Protection Act would require employers
to use an "appropriate" interest rate to accurately measure their
pension benefit promises. Under current law, the funding rules permit
underfunded plans to make up their funding shortfalls over a long period
of time, putting workers at risk of having their plans terminate without
adequate funding. Generally, today's rules only require plans to meet a
90 percent funded status target, or in some cases just 80 percent.
The Pension Protection Act requires employers to make
sufficient and consistent contributions to ensure that plans meet a 100
percent funding target, phased-in over five years. "This legislation is
a great first step," says James Hoffa, president of the Teamsters.
"The alternative is not the continuation of the status quo, but a
much worse fate that includes the loss not only of accrued ancillary
benefits, but a substantial portion of a participant's normal retirement
benefit as plans are assumed by the PBGC," adds Judy Mazo, director of
research for The Segal Company. Indeed, it's fairly common for plan
participants to receive just half of what was guaranteed to them if the
PBGC takes over the pension.
The good news is that share prices and interest rates are rising,
putting less pressure on companies to allocate additional resources to
their pensions. But, those increases are not expected to be enough to
ease the current funding shortages that are at record levels, or $353
billion -- up from $279 billion in 2003. In 2004, the PBGC disbursed
more than $3 billion in benefit payments to 517,000 retires, up from
$2.5 billion paid to 459,000 individuals in 2003.
Companies, however, can't just shirk their responsibilities to
retirees. Avista Corp., for example, made $12 million in contributions
to its pension in 2002 and 2003. Those utilities with the largest
underfunded pensions at year-end 2002, says Merrill Lynch, include
Exelon ($2.4 billion), FirstEnergy Corp. ($977 million), Public Service
Enterprise Group ($837 million) and American Electric Power ($788
million).
Balancing Act
Utilities are in a jam. But the reality is that they must adequately
fund their pension plans. Putting too little money in not only
jeopardizes the retirement security of their employees but also prompts
the pension agency to assess it with higher premiums. Meanwhile,
accounting rules will force those businesses to recognize any
underfunding -- a standard that affects debt-to-capital ratios and
therefore credit quality.
The 401(k) alternative is attractive because the risks fall squarely
on plan participants. But, even those plans are coming with some peril
to employers. Williams recently said it has settled with plaintiffs and
will pay $55 million -- most of which is covered by insurance -- because
of allegations it breached its fiduciary duties.
Meantime, employees at Southern California Gas Co. filed suit
alleging that older workers there were discriminated against when the
company dumped its defined benefit plan in favor of a defined
contribution plan. The plaintiffs want the original plan, dropped in
1998, to be reinstated.
Most companies want to maintain their pensions, whether they are
defined benefit or defined contribution plans. Congress is remiss to add
a new layer of requirements but the risk of default in some defined
benefit cases has reached alarming levels. The goal now is to protect
workers without impeding start ups or causing the termination of
existing plans.
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