Employers may not get everything they want from pension reform legislation being hammered out on Capitol Hill, but they have apparently prevailed on one sticking point—credit ratings likely will not be used to determine the vulnerability of a pension plan and trigger higher payments.
Instead, the funding status of the plan itself would be the barometer, according to sources close to House-Senate talks. If a plan is above 80 percent, it would not be deemed “at risk.”
A plan below 80 percent would subtract its credit balance from its assets and divide that number by its liabilities. If the resulting ratio is less than 70 percent, then the company would have to increase the amount of money it puts into its plan.
A recent study of S&P 500 companies by Mercer Human Resource Consulting shows that the average pension plan is funded at 83 percent.
Even though the credit rating issue is moving toward resolution, officials caution that nothing in the complex bill is final until everything is final.
“Because all of the different moving parts have to mesh perfectly to get a bill, we do not comment on current or prospective details of the draft bill,” says J. Craig Orfield, spokesman for Sen. Mike Enzi, R-Wyoming, chairman of the Senate Health, Education, Labor and Pensions Committee.
Some companies are disappointed that credit balances, which are built up by making higher-than-required pension contributions in some years, probably won’t be used to calculate funding status.
“It’s not the optimal outcome,” says Lynn Dudley, vice president of the American Benefits Council, which represents more than 200 large corporations. “Companies are realistic about the direction the bill is going.”
The business community is sitting tight rather than reacting to this development.
“I don’t think they’re rushing to the door (to end defined-benefit plans),” she says. “They are trying to be practical about controlling cost volatility.”
It’s likely the final bill would require companies to fund 100 percent of their defined-benefit pension promises within seven years.
A number of huge pension defaults by legacy industries like airlines and steel manufacturers have helped create a nearly $23 billion deficit at the federal Pension Benefit Guaranty Corp. A faltering stock market, declining interest rates at the beginning of the decade and, the Bush administration argues, lax funding rules have led to $450 billion in total pension underfunding.
The conference committee, which has missed several self-imposed deadlines, may push to complete its work before the August congressional recess.
Beyond credit ratings, difficult negotiations remain about the legal status of cash-balance plans, rules governing investment advice for 401(k) products and whether to give airlines 20 years to shore up their pensions. A couple tax reform measures also may be added to the bill.
Watson Wyatt Worldwide says that 113 companies in the Fortune 1,000 have frozen or terminated their pension plans as of April, up from 71 in 2004.
In another pension development, the Department of Energy has suspended for one year its April decision to stop reimbursing federal contractors for defined-benefit pension costs.