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Iraq War Bill Makes Changes To Pension Rules

June 19, 2007
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Related Topics: Retirement/Pensions, Benefit Design and Communication, Latest News
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When President Bush signed a bill just before Memorial Day that would provide funding for the Iraq war, he also ushered in new employment law.

The high-profile workforce provision included in the Iraq bill raises the minimum wage to $7.25 during the next two years. But buried in the legislation were changes to a massive 2006 pension reform bill.

The modifications may be a harbinger for further tinkering to that 900-page measure, which, among many other reforms, tightened funding rules for defined-benefit plans and required them to cover 100 percent of liabilities.

The legislation was spurred by spectacular pension defaults following the economic downturn early in the decade and the specter of future airline pension collapses. It was that industry that received the most substantial relief in the Iraq legislation.

In the original pension bill, Northwest and Delta, which had put their pensions in a “hard freeze,” were allowed to use an 8.85 percent interest rate to calculate liabilities. American and Continental, whose plans were in a “soft freeze,” had to use a yield curve interest rate of about 6 percent.

But those two carriers were able to secure language in the Iraq bill that would allow them to use an 8.25 percent interest rate, a much more favorable rule because a higher rate lowers pension costs.

The nimble footwork by American and Continental lobbyists has drawn the ire of two senators who are instrumental in setting pension policy.

Finance Committee Chairman Max Baucus, D-Montana, and Ranking Member Charles Grassley, R-Iowa, sent a letter on June 6 to the CEOs of each airline requesting that they tell the panel how big their projected minimum contribution to their pension plans would be before and after the relief they received in the Iraq spending measure. They also asked for the number of participants in each plan and the amount of accrued benefits in excess of the amount insured by the Pension Benefit Guarantee Corporation.

"These two airlines flew around the Finance Committee to get this pension provision in the spending bill, but we will review in the light of day exactly what deal they got," Baucus said in a statement.

Grassley said that Congress spent months assembling the pension bill last year, taking into account the airlines' situations and the potential liability borne by taxpayers if they defaulted on their pensions.

"Now these two airlines and their allies in Congress have undermined that work," Grassley said in a statement.

Among other changes slipped into the Iraq bill were provisions affecting the use of excess pension funding for retiree medical benefits and setting rules for treating multiemployer plans as single-employer plans.

Meanwhile, House and Senate committee aides have been hammering out a bill that would make technical corrections to the 2006 pension law. It’s not clear whether that measure will include changes as substantive as those provided for the airlines in the Iraq legislation.

As part of the effort to produce a corrections measure, a House Education and Labor subcommittee held a hearing in early May in which witnesses called for an array of changes to the pension bill.

Airline pilots argued that they should receive the maximum federal pension insurance benefit granted to people who retire at 65, even though pilots must quit at 60.

Scott Macey, senior vice president of Aon Consulting Inc., asserted that the effective date of the new funding rules should be delayed from 2008 until 2009, phase-in funding targets should be loosened, and references in the bill to “asset averaging” should be changed to “asset smoothing” to better ensure market valuations.

“The law was so complex and comprehensive that, without a criticism of anyone, you need a few corrections to carry out what the intent is,” Macey says.

The chairman of the subcommittee maintains that he does not intend to rewrite the original pension bill, which took years to produce.

“I’m not interested in upsetting the delicate balance that was struck in 2006,” says Rep. Robert Andrews, D-New Jersey. “I want to see how it works in practice for a reasonable amount of time. We want this to be a thoughtful, deliberative process that improves the law.”

Mark Schoeff Jr.

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