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Report Links Pension Obligations to Layoffs

October 30, 2009
Fulfilling pension funding obligations can result in job losses, according to a report released Friday, October 30.

The American Benefits Council, a national trade organization composed of large companies and plan sponsors, commissioned the analysis to bolster the case for legislation that would ease rules put in place by a landmark pension reform bill that went into effect last year.

Called the Pension Protection Act, the law significantly tightened defined-benefit funding rules and required companies to meet 100 percent of their obligations within seven years, beginning in 2008.

But companies and business groups are telling lawmakers that the stepped-up pension funding is coming at the worst possible time—in the middle of a severe economic downturn.

“Requiring employers to increase their funding to defined-benefit plans during a recession leads to layoffs and bankruptcies, suggesting that the pension funding obligations could fundamentally alter the distribution of jobs in the economy based upon what industries have made longstanding commitments to defined-benefit plans,” states the report by Optimal Benefit Strategies.

The document consists of an analysis of previously conducted academic research and surveys. For instance, a June report by Aon Consulting shows that 68 percent of employers indicated that allocating cash to pension funding would cause them to cut hiring and workforce training.

Judy Xanthopoulos, a principal at Optimal Benefits Strategies, said that funding a pension plan takes investment away from other business operations.

“The research is pretty consistent in finding that there is an inverse relationship,” Xanthopoulos said in an October 30 media availability. “There is a tradeoff they have to make.”

Advocates are urging Congress to approve a pension relief bill this year, before companies determine their new pension obligations on January 1.

A recent report by Watson Wyatt Worldwide indicates that the funded status of defined-benefit plans will drop to 83.8 percent in 2010 and 76.8 percent in 2011, potentially requiring $89 billion and $146.5 billion in payments, respectively.

Reps. Earl Pomeroy, D-North Dakota, and Pat Tiberi, R-Ohio, introduced a measure on Tuesday, October 27, that would give companies more breathing room to amortize pension shortfalls.

On Thursday, October 29, the Senate Health Education Labor and Pensions Committee held a hearing on preserving retirement security during the recession.

Sen. Tom Harkin, D-Iowa and chairman of the Senate labor panel, said in an interview afterward that he’s not sure when a Senate pension relief bill might be introduced or how far-reaching it would be.

“It seems like the Pomeroy bill has broad support,” Harkin said. “It’s the short-term fix. Do we do the short term and not do the long term? Kick that can down the road?”

The scope of the relief legislation is just one challenge. There is also the matter of getting it through two committees of jurisdiction each in the House and Senate and then wedging it onto a congressional calendar dominated by health care.

“It will have to be something that really has broad support, bipartisan support,” Harkin said. “Floor time is going to be very, very minimal.”

There also is likely to be resistance over bill details. In testimony before the HELP Committee, Karen Friedman, executive vice president and policy director for the Pension Rights Center, urged senators to deny help to firms where workers were no longer accruing retirement benefits.

“Companies that have stood by their defined-benefit programs while others have abandoned or frozen them deserve the support of Congress,” Friedman said. “Companies that have frozen their plans … have severed this commitment to their workers.”

She also questioned whether the relief savings would be put toward job creation. “This money could be used for any purpose, including moving jobs overseas, automation and executive compensation,” Friedman said.

Relief advocates maintain that all companies should get relief because the central issue is preserving jobs everywhere. They’re hopeful about prospects for legislation.

“The message is getting through,” said James Klein, American Benefits Council president. “We’re cautiously optimistic.”

—Mark Schoeff Jr.

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