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Pension Reform Proposal Could Hit Companies with Older Workforces the Hardest

January 28, 2005
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If the Bush Administration’s proposed reform for the defined benefit system passes as is, companies in the manufacturing, transportation and communication industries will be hit the hardest, according to a recent report by the Employment Policy Foundation, a non-partisan Washington, D.C.-based research foundation.

These companies, which are already being battered by increasing competition and the threat of outsourcing, may now be punished further by their own government for having older workforces, the report states.

"The issue that is really not being looked at is the circumstances of the companies on a company-by-company basis," says Ed Potter, president of foundation.

At issue is the way in which companies would determine how much they need to fund their plans. Under current law, pension providers tie their liability to a four-year weighted average on a long-term bond rate. This assures that there are no volatile jumps from year to year and provides a standard for every company. The new proposal, however, would require that companies calculate liabilities based on the age of their covered employees.

This could mean a 3.5 percent increase in reported pension liabilities for workers aged 55 and older and a 2 percent increase for workers aged 50 to 54, according to the foundation’s report. This disproportionately hurts pension providers with older workforces, Potter says. "If you are in high tech and you have a young workforce, your costs, or the amount of money you have to put in the plan, are substantially less than a company that happens to have older workers." For example, companies such as Motorola Inc. and Texas Instruments Inc. have traditional defined benefit plans.

The liability calculation isn’t the only issue that the foundation and other critics have with the administration’s pension reform proposal. The premiums that companies pay to the Pension Benefit Guaranty Corporation would also rise--up to $30 per participant from the current $19. While $11 per employee may seem like a small increase, the Employment Policy Foundation report notes that it can add up for large companies: Those in the manufacturing sector, which comprises more 16 million pension plan participants, will pay $179 million more in premiums under the proposal, according to the foundation report.

"I understand that the government does not want to get stuck with the bill, and the private sector does need to be responsible, but this seems that they are taking a large sledgehammer to a problem that only affects a few," Potter says.

If the proposal passes, critics says, the result would be that even more companies will drop their defined benefit, deciding that they do not want to take on the added costs of these programs. The number of defined benefit pension plans in the United States has already decreased 25 percent from 1999 to 2003, according to the American Benefits Council, a national trade association that deals with employee benefit systems.

"Companies that are in a weak position may decide it’s easier, or that they have no choice, but to terminate the plan as a result of this proposal," says James Klein, president of the American Benefits Council.

Jessica Marquez, staff writer,
jmarquez@workforce.com

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