As House and Senate negotiators got back to work in late April, the clock was ticking on pension reform. And the longer it takes to reach an agreement on a final bill, the more time business will want to adjust to the changes it ushers in. Those changes were looking more likely as the threat of a White House veto subsided.
A reform measure likely will require businesses to fund 100 percent of their pension promises. One of the major sticking points is the use of credit ratings to determine whether a company must increase payments to its pension plan. A proposal to give airlines longer than other businesses to shore up their pensions is also generating controversy.
Pension reform is driven in part by a nearly $23 billion deficit at the Pension Benefit Guaranty Corp. and an aggregate $450 billion in underfunded pension liabilities. Pension plan funding improved slightly in 2005, according to a new study by Milliman Consultants and Actuaries.
The Bush administration has been threatening to veto any pension bill it deems too weak. But House Majority Leader John Boehner, R-Ohio, said that after meeting with a top White House economic official in early April, he doubts the president will turn down a House-Senate compromise.
"I feel confident that we can produce a pension reform bill that the administration will wholeheartedly support," Boehner said in an April 25 meeting with reporters, according to a transcript provided by his office.
Although the April 15 deadline for the first pension payment of the year has passed, a leading business advocacy group, the Pension Coalition, says it is not as concerned about the calendar as it is about the substance of the final bill.
The group, comprising about 200 companies and trade associations, warns that Congress must give businesses time to adjust.
"The longer they go, the more critical it is that they put off the implementation date for a year," says Martin Reiser, manager of government policy for Xerox and spokesman for the coalition.
There may not be enough time for the Treasury Department to write the regulations necessary to implement pension legislation by January 1, according to Reiser. Proposals call for funding requirements to increase from 92 percent to 100 percent incrementally beginning in 2007.
"Part of the problem is, what does 92 percent mean?" Reiser says. "Treasury would have to spell that out."
Beyond the uncertainty of pension reform, businesses also face the prospect later in the year of new rules from the Financial Accounting Standards Board that would require them to put the funding status of their pension plans on their balance sheets. Currently, that number is contained in footnotes of financial reports.
A study by Watson Wyatt shows that the accounting change would cut shareholder equity of the Fortune 1,000 by 10 percent, hitting transportation, communication and utility companies particularly hard. Milliman calculates that shareholder equity would have decreased by $222 billion in 2005 for the 100 large firms it tracks.
But so far, there’s no sign that businesses will drop defined-benefit plans en masse.
"It’s too early to tell whether we’re going to reach a tipping point where there’s a rush to the doors," says Alan Glickstein, a senior consultant at Watson Wyatt.