An agreement may be reached by the end of May on a final bill that likely will require businesses to fund 100 percent of their pension promises. One of the major sticking points is the use 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 also is generating controversy.
Pension reform is driven in part by a nearly $23 billion deficit at the Pension Benefit Guarantee Corporation and an aggregate $450 billion in underfunded pension liabilities. The funded status of pension plans improved slightly in 2005, according to a new study by Milliman Consultants and Actuaries.
Although the April 15 deadline for the first pension payments 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 overwhelming sense of people in the coalition is that Congress needs to do as good a job as possible and get this right rather than get it done on a certain date," says Martin Reiser, manager of government policy for Xerox and spokesman for the coalition.
But the group, comprising about 200 companies and trade associations, also 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," Reiser says.
There may not be enough time for the Treasury Department to write the regulations necessary to implement pension legislation by Jan. 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 with defined benefit programs also face the prospect later in the year of new rules from the Financial Standards Accounting 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 for 100 large firms with defined benefit pension plans in 2005 if the rule had been in effect.
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.