Pension funding rules are estimated to cost companies more than $100 billion next year—hardly small change in any year, let alone one that could see a severe recession—and could force corporations to eventually freeze or terminate their defined-benefit pension plans.
But getting Obama and lawmakers to pay attention to pension funding could prove to be a major challenge. So lobbyists are preparing to make a broader case for relaxing the rules.
“It’s not just a pension issue,” said Lynn Dudley, senior vice president of policy at the American Benefits Council, an employer advocacy group in Washington that’s lobbying on behalf of hundreds of corporations for some temporary relief from pension funding rules. “It’s a major economic issue that needs to be recognized immediately.”
By the time Obama assumes office in January, scores of corporations will likely be burdened with significantly underfunded pension plans. And, just as major losses in the equity markets sucked assets out of pension plans during the past 10 months, relatively new pension rules have the potential to drain billions from corporations’ coffers next year.
A new study released by the Boston College Center for Retirement Research earlier this month suggested that employers could be on the hook for up to $150 billion in pension contributions in 2009—triple the $50 billion in contributions companies will make this year.
“Companies have already been forced to tap into their cash this year for basic business purposes, like making payroll,” noted Judy Schub, managing director for the Committee on Investment of Employee Benefit Assets, which represents more than 100 corporate plan sponsors. “With eroding cash positions, and very little access to credit, companies will be forced to fund their pensions by cutting their operations and workforces—and that clearly was not the intention of these new funding requirements.”
The new funding rules, which were included in the Pension Protection Act of 2006 and went into effect this year, require companies with underfunded plans to make larger, more aggressive contributions to quickly get their pensions 100 percent funded (the previous target was only 90 percent). There was also a provision to force companies to freeze their pension plans if funding levels fall below 60 percent.
“That’s the double whammy,” Dudley said. “At the same time people could be losing their jobs because their companies are forced to make cutbacks, workers’ retirements could be compromised too.”
The cost of contributions to corporations is expected to resonate with Obama and Congress, but it is the threat to workers’ retirement security that could ultimately lead the new administration to take action and ease the new pension requirements.
“If we don’t do something soon, we could be ringing the death knell on the remaining presence of defined-benefit plans,” said Rep. Earl Pomeroy, D-North Dakota.
Obama has been described as “pro-defined benefit” by several pension observers, who noted that while addressing pension issues may not be the president-elect’s first order of business, it’s certainly on his radar screen. And Pomeroy, a member of the House Ways and Means Committee, noted he is “flat-out confident” that some form of pension relief will be provided to corporations, maybe even before Obama is sworn into office.
“With the economy in crisis, pension funding has been overlooked,” Pomeroy acknowledged. “But we’re now starting to see a clear, bipartisan consensus develop that this is an issue that could have severe consequences on corporations and their employees if it isn’t addressed.”
Obama and his administration are expected to be particularly sensitive to retirement issues in light of the recent damage that has been done to workers’ 401(k) savings. Forced freezes of pension plans would only serve to further threaten the retirement security of workers, something Obama’s chief of staff, Rep. Rahm Emanuel of Illinois, has been vocal about in the past. Emanuel advocated securing airline industry workers’ retirement plans in 2004 when United Airlines and US Airways were in the middle of bankruptcy proceedings.
The dramatic declines in equities this year have also underscored just how vulnerable participants in defined-contribution plans are to wild swings in the stock market, and may prompt Obama and Congress to encourage the use of more defined-benefit plans, said Donald Myers, partner in the financial industry group at law firm Reed Smith.
“It would be going in the opposite direction that companies have been heading with traditional pension over the last several years,” Myers said. “But the concept of a guaranteed pension system has never looked better than it does right now.”
That, however, is an issue that Obama and Congress may wait to address.
For now, employer advocates such as the American Benefits Council, Financial Executives International and the U.S. Chamber of Commerce are not waiting for Obama to assume his new post. More than a dozen advocates have already begun lobbying lawmakers for technical corrections to the PPA that could provide some short-term relief for corporations that must make major contributions next year.
Ideally, these corrections—which would slow the transition period to PPA requirements and would let plan sponsors smooth out pension losses beyond 2009—would be included in a new stimulus package before Congress ends its current session, said Cady North, manager of government affairs at Financial Executives International in Washington. Pomeroy concurred, and noted that it would be “strongly preferable” to push some relief through this year.
“We’re not asking to repeal PPA, and we’re not asking Treasury for any money,” said North, whose organization represents 15,000 financial officers. “We’re asking for some temporary relief. And it’s a very time-sensitive request that needs to be addressed now, because corporations need to budget for next year.”
And those contributions appear as if they could be significantly more than many companies were figuring earlier this year. Consulting firm Watson Wyatt gathered data from 28 corporate clients, who estimate that their aggregate required pension contributions will be $2.1 billion—181 percent higher than those companies had previously budgeted.
“You can make a reasonable argument that these kinds of unexpected increases couldn’t come at a worse time for corporations,” said R. Evan Inglis, chief actuary at Vanguard. “But it’s also coming at a time when there are so many other critical issues the government needs to address that it certainly isn’t at the top of anyone’s list in Washington right now.”
Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail firstname.lastname@example.org.