The lump-sum payments that millions of American workers can take from their
pension funds when they retire, change jobs, or are laid off would be reduced
by as much as one-third under a bill pending in Congress.
The Boston Globe reported that the bill is part of a sweeping measure, intended
to give relief to companies burdened with heavy stock market losses in their
If there's a gap between what a company will be obligated to pay retirees
in the future and the current investments funding those benefits, the company
is now obligated to increase its contributions to close the gap. But with the
economy still weak, many companies say they are straining to pay rising contributions.
"'You have low interest rates driving the liabilities up at the same time
the poor investment market is driving assets down, so [companies] can go from
being overfunded to underfunded in a very short period,'' said Alan Glickstein,
a consultant for Watson Wyatt Worldwide in Boston.
The broader legislation, cosponsored by Reps. Rob Portman, R-Ohio, and Ben
Cardin, D-Maryland, would overhaul the interest-rate formula, so that:
- the new rate would be pegged to corporate bond rates, rather than to the
30-year US Treasury bond, which is used currently. Corporate bonds usually
carry a higher rate than government securities with the same maturity dates.
- an increase in rates used to determine lump sums would be phased in, starting
in 2006. The new rate would probably be about 1 percentage point higher than
it is now, according to the Globe.
But a little-noted side effect of the proposal would reduce payments to employees
covered by traditional, defined-benefit (DB) pension plans who opt to take a
lump sum when they leave their employers, the newspaper reports. DB plans cover
about 23 million American workers, and at least half of them allow them to take
a lum-sum option immediately, rather than receive a monthly pension check later.
''We're talking about an act of Congress that could dramatically reduce your
pension benefit 10 percent, 20 percent or more,'' said David Certner, director
of federal affairs for AARP. ''This is a huge, explosive issue - billions of
dollars we're talking about, not just this year but forever.''
Using a higher interest rate in a mathematical formula to estimate future retirement
benefits would immediately shrink corporate pension obligations and decrease
their required contributions. If the rate is increased permanently in corporate
calculations of liabilities, that same rate would also apply to lump-sum calculations.
The bill has the backing of not only corporate America, but also labor unions,
according to the Globe.
Critics, however, say corporations are overstating the severity of the problem,
noting that many Fortune 500 companies have had growing pension-fund liabilities
for years. The health of corporate pension funds waxes and wanes with the market's
ups and downs, they argue; many companies took ''contribution holidays'' when
stocks were booming.
Higher rates would reduce lump-sum payouts, and if interest rates rose, it
would lead to further cuts. According to Watson Wyatt, a one percentage-point
rise in rates translates to a reduction in the lump sum of between 8 percent
and 37 percent, depending on the employees' age; the younger the worker, the
greater the loss.