A Bush administration proposal to change how corporations calculate their pension
liabilities could force some major employers to trim retirement benefits or
drop traditional pension plans altogether, according to some business groups
as well as labor unions.
On Monday, the administration announced that it wants to stop the current practice
of using long-term Treasury bond rates as a benchmark for calculating pension
liability. The rates have been very low of late, and the lower the rate, the
more money that companies must invest to cover projected obligations.
Bipartisan legislation under consideration by the House Ways and Means Committee
would switch the benchmark to a composite corporate bond rate. It would substantially
lower the amount of money companies would have to put into their pension plans.
And it has the support of a delicate labor-management alliance.
But the Bush team's proposall would go further. For the first two years, all
companies would use the same long-term corporate bond rate to calculate pension
liabilities. During the next three years, they would move to a complicated corporate
bond yield curve, which plots the yields of bonds of different maturities.
Companies with a substantial number of retirees and older workers - who are
already receiving pension payments or will be soon - would have to use shorter-term,
lower-yielding corporate bonds to calculate their liabilities. Those companies
could face a higher liability than under the current system.
Companies with younger workers, who will not draw pensions for many years,
could use longer-term corporate bonds with higher interest rates. Those companies
would have to contribute less money.
Reps. Rob Portman (R-Ohio) and Benjamin L. Cardin (D-Md.), who proposed the
pension legislation pending in the House, promised to give the administration's
plan a hearing.
"We don't want to be blind to new ideas as they come along," Portman
told the Post. "I don't want to say we ought to accept their proposal verbatim,
but I think we ought to look at it."
But Cardin added that significant changes to his and Portman's formula could
wreck the alliance behind their legislation and imperil the whole effort. "You
change the assumption rates, you change the rules, then anything could happen,"
Indeed, James A. Klein, president of the business-backed American Benefits
Council, said he had "serious concerns" about the administration plan.
"The proposal of using a yield curve for valuing pension liabilities would
inject needless volatility and complexity in pension funding," he said
in a prepared statement. "Increased volatility in particular would hurt
defined benefit plan sponsorship at a time when the pension system needs strengthening."
Union officials and labor economists said the plan would hurt precisely the
corporations with the most troubled pension plans: older, more mature industrial
companies that would only be encouraged to cut back or drop their defined-benefit
pensions, or even shift their payrolls to a younger workforce.