Pension reforms recently proposed by the Bush Administration, while having
good intentions, could force many sponsors of traditional pension plans to freeze
or terminate their plans, according to a new analysis from the Employment Policy
Foundation (EPF), a Washington, D.C.-based research group.
The decision to freeze or terminate the plans could come based on the higher
costs employers would incur under the Administration's proposal, EPF says.
EPF's analysis found that the manufacturing industry, which is faced with
the challenges of global competition, would be hardest hit by many of the
proposed reforms. In particular, the proposal would tie pension-funding
requirements to a yield curve that would require companies to calculate
liabilities based on the age of their covered employees. This reform would
hit manufacturing, transportation, and utilities companies hard since they
have older workforces.
For workers ages 55 and older, the plan could cause reported pension liabilities
to rise 3.5 percent, according to EPF, while reported pension liabilities for
workers ages 50 to 54 could increase by 2.0 percent. Employers would need to
ensure they have sufficient assets to fund these additional liabilities; otherwise,
they would have to take funds from their general operating account to cover
these additional expenses.
"Those increases may seem small," EPF President Ed Potter says, "but,
for a large manufacturing firm the increases may mean the difference between
making a profit and not. Furthermore, the lack of rate averaging in the proposal
would make planning required contributions difficult for employers."
The administration's proposal would also significantly increase the cost of
required pension insurance payments to the Pension Benefit Guarantee Corporation
(PBGC), according to EPF's analysis. Under the proposal, payments under the
fixed rate premium system would rise by 58 percent. EPF's found that this reform
would also hit manufacturers particularly hard. Fully 49 percent of all premium
increases would be paid by the manufacturing industry.
"The changes to fixed rate premium would add up to $178 million annually
for manufacturers alone," Potter says. "These costs fall on a sector
still trying to rebound from declining margins in areas such as computers, electronics
and motor vehicles."
The administration's proposals for reforming pension insurance payments
and funding requirements for defined benefit plans indicate that it is
concerned about the long-term solvency of the system. However, the
proposed reforms would greatly stress many firms who are already
struggling to meet their pension obligations.
"Ultimately, Congress and the Administration must recognize that the current
defined benefit system is voluntary. Reforms that greatly increase the burden
on plan sponsors run the risk of causing many employers to stop offering those
plans to their employees," Potter says.
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