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Law gives companies a break on pensions
WASHINGTON -- A new law will let companies contribute billions of dollars less to their workers' pension funds, raising concerns about weakening the plans that millions of Americans count on for retirement.
But with many companies already freezing or getting rid of pension plans, many critics are reluctant to force the issue.
Some expect the changes, passed by Congress last month and signed Friday by President Barack Obama, to have little impact on the nation's enormous $1.9 trillion in estimated pension fund assets. And it is more important, they suggest, to avoid giving employers a new reason to limit or jettison remaining pension benefits by forcing them to contribute more than they say they can manage.
The equation underscores a harsh reality for unions, consumer advocates and others who normally go to the mat for workers and retirees: When it comes to battling over pensions, the fragile economy of 2012 gives the business community a lot of leverage.
"That wouldn't do our members any good" if the government forces companies to make pension contributions they can't afford, said Karen Feldman, benefits policy specialist for the AFL-CIO, the giant labor federation that supported the legislation.
AARP lobbyist Debbie Chalfie said the seniors organization was concerned that companies contribute the right amount to their pension funds, but at the same time, "We want to make sure employers continue offering these plans."
Even the Pension Rights Center, which advocates for pensioners, was torn. Executive Vice President Karen Friedman said the group was "sympathetic to business concerns" that companies have been hurt by the recession, though still worried that reducing corporate pension contributions could hurt consumers.
The short-term contribution cuts worry University of Pennsylvania insurance professor Olivia S. Mitchell, who says the fact that Congress can change the formula "does not mean that pension funds will be able to defy the laws of economics and finance."
Counting on pensions
Nearly half of Americans say they are counting heavily on their pensions for retirement, according to an Associated Press-LifeGoesStrong.com poll conducted last October. Yet times are rough for pensions.
Only 15 percent of private sector workers participate in defined benefit plans, which guarantee company-paid monthly retirement payments, according to the Employee Benefit Research Institute. That 2008 figure was down from 38 percent in 1979.
During that same period, the number of workers in defined contribution plans, like 401(k) investments to which workers and companies contribute, has grown to 43 percent. These plans are considered less advantageous for employees because workers contribute much of the money and bear the investment risk.
Four of every five of the 27,000 single-company pension plans insured by the government's Pension Benefit Guaranty Corp. were considered underfunded in 2009, meaning their liabilities exceeded their assets. The average plan carried just 81 percent of the money it needed, a record low, the PBGC says.
Liabilities are due over workers' lifetimes, not all at once.
More than one in four companies have frozen benefits, meaning employees can no longer collect a bigger check in retirement by working additional years or getting promotions and raises. In the government's 2011 budget year, the PBGC took over 152 plans, bringing to nearly 4,300 the number it controls or is planning to take over, covering 1.5 million workers and retirees.
The bill Obama signed into law last Friday renews transportation programs and extends low interest rates on student loans. It was partly paid for by changing pension laws. It would raise around $10 billion over the next decade by boosting the premiums companies pay the government to insure their pension plans, and another $9 billion by changing how businesses calculate what they must contribute to their pension funds.
That computation change will let companies estimate their pension fund earnings by assuming the interest rate will be near the average of the past 25 years, rather than the past two years when interest rates have been extremely low. Since they will now be able to assume that their pension investments are earning higher profits, they will be required to contribute less money from corporate coffers to make up the difference.
The government makes money because companies will make fewer pension contributions, which are tax deductible.
Employers disliked the previous system because interest rates bounce around from year to year, making pension contributions hard to plan. Business leaders also complained that low interest rates meant the old formula was forcing them to make artificially high contributions, diverting money from other priorities.
"It means we're not going to be going out and hiring people, building more factories, giving more benefits to people" with that extra money, said Kathryn Ricard, senior vice president for the ERISA Industry Committee, which represents large companies' employee benefit plans.
Workers should be concerned that the old requirements were hurting "to the point where they have to be more worried about their jobs," said Lynn Dudley, senior vice president for the American Benefits Council, representing Fortune 500 companies' benefit programs.
The Society of Actuaries, whose members specialize in assessing financial risk, estimates that the new law will cut the $80 billion in required company pension contributions this year by no more than $35 billion. That's out of roughly $1.9 trillion companies have invested in these plans, the society estimates.
The contribution reduction would peak at $73 billion next year, but by 2016 companies will contribute more under the new law than the old one.
For now, failing to use current interest rates means "plan underfunding will worsen, threatening not only the pension system" but also the federal Pension Benefit Guaranty Corp., said University of Pennsylvania professor Mitchell. The agency's deficit grew to $26 billion last year.
To help address that, the new law will gradually increase the $35 annual premium employers pay the PBGC for each worker and retiree to $48 by 2014. To give companies an incentive to fully fund their pension plans, it also will gradually double the additional premium that companies pay for each $1,000 their plans are underfunded, to $18 by 2015, and adjust the premium yearly to reflect inflation.
When the PBGC takes over a pension plan, it pays retirees the full amounts they were entitled to, up to an annual maximum of nearly $56,000 when workers retire at age 65.
The new system is riskier because there is no guarantee that pension funds will earn more than today's low interest rates, said Donald Fuerst, senior pension fellow with the American Academy of Actuaries.
"I think it should make people wary," Fuerst said, but it shouldn't be their prime concern.
"What they should really look to is, is the company that sponsors their pension plan a financially strong company" that can weather market ups and downs, Fuerst said.
Many analysts say with such large sums invested in corporate pensions, they don't expect the reduced contributions to have a major impact.
"Lowering contributions is not desirable, but the amount by which contributions are lowered is probably not that substantial," said Alicia Munnell, director of Boston College's Center for Retirement Research.