Mention the word pension to someone over the age of fifty and they will either wince or drift off into a fond recollection of a time gone by when the world spun on the notion, albeit quant, that the company you worked for cared enough to concern itself not only with the here and now but your future as well. 

Mention the word pension to someone younger and the reaction will be quite different. How in the short space of one worker’s career could the landscape change so dramatically? The simple answer is legislation.

While governments were designed to protect and serve, only the naïve believe that this is how your government operates. The creation of the Pension Benefit Guaranty Corporation was one such attempt to keep solvent the pension plans of companies that ran into financial trouble. Rather than allow the promises made to disappear completely as they did before the creation of the agency (Employee Retirement Income Security Act of 1974 or ERISA), legislation was passed to protect workers from a total loss of post-work income. 

To ensure that the 44 million workers covered by pension plans received some of the monies promised, the PBGC, acting as an insurance company began charging companies premiums. These were levied against both single and multiemployer pension plans and in the process guaranteeing that some of the promised pension benefit – up to $45,614 at age 65 – would be there at retirement no matter the fate of the company.

The PBGC is not backed by the full faith and credit of the federal government but does rely on Congress for changes in how it does business. This oversight by Congress was amended this past week in a 907 page bill approved by both the House and the Senate.

Unfortunately, the intended consequences of the bill will probably not align with Congress’s supposed intentions while giving the companies who promise benefits they can ill-afford to deliver the time to get back to even or wait for further bailout legislation down the road.

The PBGC’s main problem is not the multiemployer pensions. Those seem to be doing just fine (more on these plans further on). The single employer pensions however have prompted the agency to ask for a better way of collecting the necessary funds to continue its operation. They may have, in the process, unwittingly spelled the end to the pension as we know it.

The new pension bill forces the hand of too many under funded pension plans. By requiring them to get their plans to even in seven years (after the bill takes hold in 2008) using accelerated payment schedules, some companies will be under a great deal of pressure to get those plans current. 

Not only does the bill allow for additional time, when you add in the special concessions for troubled industries, the bill begins to look very weak indeed.

While it is perfectly healthy for employees to plan from a worse case scenario, your pension plan, the PBGC feels, should be required to do so as well. Far too many plans do exactly the opposite. The new bill will force companies “at-risk”, the ones who have under funded their plans into an accelerated payment plan or face penalties of up to $1250 per person.

The “at-risk” designation does not take the financial health of the company into consideration only the current funding of their pension promises. Even with the tax breaks offered to companies to get their plans fully funded, the cost of increased penalties and premiums may be more cost effective that trying to get their plans near solvency. An “at-risk” company is determined by the percentage of the plan’s funding against full solvency.

To add to the long list of downsides this bill offers, the long catch-up period will lead to future abuses as companies reach the seven-year deadline (to 100% funded). The restrictions on future promises is almost a mote point as well as the bill provides for easy conversion of these plans from a defined benefit plan (the kind of plan that increases the employee’s benefit over time) to a cash balance pension (one that divvies the pension payment based on the available cash balance in the plan). 

IBM changed to a cash balance plan in 1999 and in doing so angered employees to the point they felt compelled to file a discrimination lawsuit. On Monday, the case was dismissed, overturning the federal court ruling in 2003 stating that it had indeed discriminated against older, soon-to-be-retired employees. At the time, IBM’s plan was fully funded.

That ruling along with this bill will allow more companies to switch to these combination plans that are part pension, part 401(k). This nod to younger workers comes at a time when most older workers have built retirement plans around those estimated benefits.

The second no less heinous option is the freeze. This allows companies with under funded plans the option of halting their pension obligations in the hopes that this will better allow for replenishing the fund. Hard freezes allow troubled industries such as the airlines and autos to take up to 17 years to get back to even.

Without the legislation, several companies, including NorthWest and Delta had threatened to dump their plans altogether. With the legislation, these companies will be allowed to postpone their day of reckoning by continuing to under fund their plans, offer peace promises to their workers and unions, and avoid the costs of increased premiums.

Bankruptcy and even more often, mergers and acquisitions take pensions out of existence dumping the burden back on the PBGC. Companies who have been able to keep their plans 100% funded may also see the two-year enactment period as a grace period of sorts. These businesses are also increasingly vocal about the burden of responsibility they carry because of their ability to keep their plans funded.

Multi-employer pensions were also given a loophole as well. Although many of the plans are solvent, given the opportunity, the trustees of these plans can lower benefits based on their estimations of solvency. 

Not all pension problems were addressed in this bill. The public sector pension program, which does not come under the protection of the PBGC has its own problems that pale in comparison and are looming on the horizon. 

This bill solves only a small portion of what it set out to do. That’s unfortunate. But hey, it is an election year. 

© 2006 Paul Petillo
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Paul Petillo
Blue Collar Dollar.com
Portland, OR USA
(501) 313-5252
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