New law gives US companies a break on pensions

WASHINGTON (AP) — A new law will let com­pa­nies con­tribute bil­lions of dol­lars less to their work­ers’ pen­sion funds, rais­ing con­cerns about weak­en­ing the plans that mil­lions of Amer­i­cans count on for retirement.

But with many com­pa­nies already freez­ing or get­ting rid of pen­sion plans, many crit­ics are reluc­tant to force the issue.

Some expect the changes, passed by Con­gress last month and signed Fri­day by Pres­i­dent Barack Obama, to have lit­tle impact on the nation’s enor­mous $1.9 tril­lion in esti­mated pen­sion fund assets. And it is more impor­tant, they sug­gest, to avoid giv­ing employ­ers a new rea­son to limit or jet­ti­son remain­ing pen­sion ben­e­fits by forc­ing them to con­tribute more than they say they can manage.

The equa­tion under­scores a harsh real­ity for unions, con­sumer advo­cates and oth­ers who nor­mally go to the mat for work­ers and retirees: When it comes to bat­tling over pen­sions, the frag­ile econ­omy of 2012 gives the busi­ness com­mu­nity a lot of leverage.

“That wouldn’t do our mem­bers any good” if the gov­ern­ment forces com­pa­nies to make pen­sion con­tri­bu­tions they can’t afford, said Karen Feld­man, ben­e­fits pol­icy spe­cial­ist for the AFL-CIO, the giant labor fed­er­a­tion that sup­ported the legislation.

AARP lob­by­ist Deb­bie Chal­fie said the seniors orga­ni­za­tion was con­cerned that com­pa­nies con­tribute the right amount to their pen­sion funds, but at the same time, “We want to make sure employ­ers con­tinue offer­ing these plans.”

Even the Pen­sion Rights Cen­ter, which advo­cates for pen­sion­ers, was torn. Exec­u­tive Vice Pres­i­dent Karen Fried­man said the group was “sym­pa­thetic to busi­ness con­cerns” that com­pa­nies have been hurt by the reces­sion, though still wor­ried that reduc­ing cor­po­rate pen­sion con­tri­bu­tions could hurt consumers.

The short-term con­tri­bu­tion cuts worry Uni­ver­sity of Penn­syl­va­nia insur­ance pro­fes­sor Olivia S. Mitchell, who says the fact that Con­gress can change the for­mula “does not mean that pen­sion funds will be able to defy the laws of eco­nom­ics and finance.”

Nearly half of Amer­i­cans say they are count­ing heav­ily on their pen­sions for retire­ment, accord­ing to an Asso­ci­ated Press-LifeGoesStrong.com poll con­ducted last Octo­ber. Yet times are rough for pensions.

Only 15 per­cent of pri­vate sec­tor work­ers par­tic­i­pate in defined ben­e­fit plans, which guar­an­tee company-paid monthly retire­ment pay­ments, accord­ing to the Employee Ben­e­fit Research Insti­tute. That 2008 fig­ure was down from 38 per­cent in 1979.

Dur­ing that same period, the num­ber of work­ers in defined con­tri­bu­tion plans, like 401(k) invest­ments to which work­ers and com­pa­nies con­tribute, has grown to 43 per­cent. These plans are con­sid­ered less advan­ta­geous for employ­ees because work­ers con­tribute much of the money and bear the invest­ment risk.

Four of every five of the 27,000 single-company pen­sion plans insured by the government’s Pen­sion Ben­e­fit Guar­anty Corp. were con­sid­ered under­funded in 2009, mean­ing their lia­bil­i­ties exceeded their assets. The aver­age plan car­ried just 81 per­cent of the money it needed, a record low, the PBGC says.

Lia­bil­i­ties are due over work­ers’ life­times, not all at once.

More than one in four com­pa­nies have frozen ben­e­fits, mean­ing employ­ees can no longer col­lect a big­ger check in retire­ment by work­ing addi­tional years or get­ting pro­mo­tions and raises. In the government’s 2011 bud­get year, the PBGC took over 152 plans, bring­ing to nearly 4,300 the num­ber it con­trols or is plan­ning to take over, cov­er­ing 1.5 mil­lion work­ers and retirees.

The bill Obama signed into law last Fri­day renews trans­porta­tion pro­grams and extends low inter­est rates on stu­dent loans. It was partly paid for by chang­ing pen­sion laws. It would raise around $10 bil­lion over the next decade by boost­ing the pre­mi­ums com­pa­nies pay the gov­ern­ment to insure their pen­sion plans, and another $9 bil­lion by chang­ing how busi­nesses cal­cu­late what they must con­tribute to their pen­sion funds.

That com­pu­ta­tion change will let com­pa­nies esti­mate their pen­sion fund earn­ings by assum­ing the inter­est rate will be near the aver­age of the past 25 years, rather than the past two years when inter­est rates have been extremely low. Since they will now be able to assume that their pen­sion invest­ments are earn­ing higher prof­its, they will be required to con­tribute less money from cor­po­rate cof­fers to make up the difference.

The gov­ern­ment makes money because com­pa­nies will make fewer pen­sion con­tri­bu­tions, which are tax deductible.

Employ­ers dis­liked the pre­vi­ous sys­tem because inter­est rates bounce around from year to year, mak­ing pen­sion con­tri­bu­tions hard to plan. Busi­ness lead­ers also com­plained that low inter­est rates meant the old for­mula was forc­ing them to make arti­fi­cially high con­tri­bu­tions, divert­ing money from other priorities.

“It means we’re not going to be going out and hir­ing peo­ple, build­ing more fac­to­ries, giv­ing more ben­e­fits to peo­ple” with that extra money, said Kathryn Ricard, senior vice pres­i­dent for the ERISA Indus­try Com­mit­tee, which rep­re­sents large com­pa­nies’ employee ben­e­fit plans.

Work­ers should be con­cerned that the old require­ments were hurt­ing “to the point where they have to be more wor­ried about their jobs,” said Lynn Dud­ley, senior vice pres­i­dent for the Amer­i­can Ben­e­fits Coun­cil, rep­re­sent­ing For­tune 500 com­pa­nies’ ben­e­fit programs.

The Soci­ety of Actu­ar­ies, whose mem­bers spe­cial­ize in assess­ing finan­cial risk, esti­mates that the new law will cut the $80 bil­lion in required com­pany pen­sion con­tri­bu­tions this year by no more than $35 bil­lion. That’s out of roughly $1.9 tril­lion com­pa­nies have invested in these plans, the soci­ety estimates.

The con­tri­bu­tion reduc­tion would peak at $73 bil­lion next year, but by 2016 com­pa­nies will con­tribute more under the new law than the old one.

For now, fail­ing to use cur­rent inter­est rates means “plan under­fund­ing will worsen, threat­en­ing not only the pen­sion sys­tem” but also the fed­eral Pen­sion Ben­e­fit Guar­anty Corp., said Uni­ver­sity of Penn­syl­va­nia pro­fes­sor Mitchell. The agency’s deficit grew to $26 bil­lion last year.

To help address that, the new law will grad­u­ally increase the $35 annual pre­mium employ­ers pay the PBGC for each worker and retiree to $48 by 2014. To give com­pa­nies an incen­tive to fully fund their pen­sion plans, it also will grad­u­ally dou­ble the addi­tional pre­mium that com­pa­nies pay for each $1,000 their plans are under­funded, to $18 by 2015, and adjust the pre­mium yearly to reflect inflation.

When the PBGC takes over a pen­sion plan, it pays retirees the full amounts they were enti­tled to, up to an annual max­i­mum of nearly $56,000 when work­ers retire at age 65.

The new sys­tem is riskier because there is no guar­an­tee that pen­sion funds will earn more than today’s low inter­est rates, said Don­ald Fuerst, senior pen­sion fel­low with the Amer­i­can Acad­emy of Actuaries.

“I think it should make peo­ple wary,” Fuerst said, but it shouldn’t be their prime concern.

“What they should really look to is, is the com­pany that spon­sors their pen­sion plan a finan­cially strong com­pany” that can weather mar­ket ups and downs, Fuerst said.

Many ana­lysts say with such large sums invested in cor­po­rate pen­sions, they don’t expect the reduced con­tri­bu­tions to have a major impact.

“Low­er­ing con­tri­bu­tions is not desir­able, but the amount by which con­tri­bu­tions are low­ered is prob­a­bly not that sub­stan­tial,” said Ali­cia Munnell, direc­tor of Boston College’s Cen­ter for Retire­ment Research.

Posted by Randa Wagner on Jul 9 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.