DB Sponsors Under the Gun to Fund Plans
Saint Barnabas recently announced it would be suspending future contributions to the pension plan, but a federal law will force the company to contribute more this year than it did in 2009—even with freezing the plan.
“It’s a staggering amount,” says Sid Seligman, senior vice president of human resources for the health care system, which is based in Orange, New Jersey.
The Pension Protection Act of 2006 requires defined-benefit plans to be fully funded by 2011. Because of the financial crisis, Congress eased the law’s original funding requirements in 2008. But each year, companies still need to meet specific funding levels until plans are 100 percent funded in 2011. That part of the law didn’t change.
The 2008 rule allows companies that miss targets one year to get bumped to the next annual funding level, instead of the original provision, which forced plans to be 100 percent funded the year after they missed the specific goal. For example, companies that missed the 94 percent level in 2009 would need to be 96 percent funded this year but not completely funded.
“When PPA was enacted, we never foresaw the situation we are in today,” says Lynn Dudley, senior vice president for policy at the American Benefits Council in Washington.
And while the 2008 provision improved conditions for companies, they still will need to contribute $89 billion to meet the 96-percent-funded threshold this year, consulting firm Towers Watson estimates. By contrast, the 2009 contribution was expected to be about $32 billion. The number jumps to $146 billion in 2011.
Without relief, the average funded status will be at about 83.8 percent this year and 76.8 percent in 2011, Towers Watson predicts. Congress needs to give employers more time to fund their plans, because tightened credit markets are limiting companies’ ability to borrow for pension funding and a multitude of other needs, Dudley says. If the funding requirement is not relaxed, jobs, salary increases and capital improvements are all in jeopardy, observers agree.
“Companies will have to make very hard decisions now in order to make these obligations,” Dudley says. “Should [employers] lay off people, companies are not going to have the workforce needed when they come out of the recession.”
"When [the Pension Protection Act of 2006] was enacted, we never foresaw the situation we are in today. ... Companies will have to make very hard decisions now in order to make these obligations"
—Lynn Dudley, American Benefits Council
Reps. Earl Pomeroy, D-North Dakota, and Patrick Tiberi, R-Ohio, introduced legislation late last year that would give companies more time to meet funding levels. Under the bill, companies would get a choice of either extending the contribution timeline out nine years, with the added benefit of making interest-only payments the first two years, or making payments on a 15-year schedule. If they choose the latter option, employers would need to guarantee retirement benefits and agree to other technical conditions. The bill also stretches the payment schedule for multiemployer plans.
“Most likely, we will see some form of more time early [this] year,” Dudley says.
Workforce Management, January 2010, p. 26 -- Subscribe Now!