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Pension oversight plan worries unions, firms

Corporate employers and labor unions said Monday they were worried about a new Capitol Hill proposal to tighten the definition of when troubled pension plans must add cash.
/ Source: Reuters

Corporate employers and labor unions said Monday they were worried about a new Capitol Hill proposal to tighten the definition of when pension plans are in such bad financial shape they must add cash.

The plan could drive some companies out of the pension system entirely by cracking down on pension plans that don’t deserve it, the critics warned.

It is one option being discussed behind closed doors by House and Senate negotiators trying to write a compromise bill to get the traditional U.S. pension system on sounder footing.

“We’re very concerned. This is core to whether companies can stay in (the pension system) or not,” said Lynn Dudley, vice president for retirement policy at the American Benefits Council. It represents large employers with pension plans.

“We hope they are not too harsh too quick,” said Alan Reuther, legislative director for the United Auto Workers union. The proposal for defining “at risk” plans could affect automakers and many other companies, he said.

Lawmakers aim to identify the bad actors in defined benefit pension plans to make them better fund their plans. Some 44 million Americans rely on the system.

Defined benefit plans, which pay a fixed amount to retired employees, are underfunded as a group by $450 billion. The agency that insures them, the Pension Benefit Guaranty Corp (PBGC), is running a $22.8 billion deficit.

House and Senate negotiators are discussing a proposal that would designate a plan at risk of default if it is less than 70 percent funded, aides said. The lawmakers were scheduled to meet again on Monday.

The catch is that the 70 percent funding level would be calculated according to a restricted plans being dumped on the PBGC.

An organization of pension fiduciary managers also expressed worry about the direction of the House-Senate talks.

“We are very concerned about this proposal because it could very easily sweep up plans that are not a danger to the system at all,” said Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets (CIEBA).

CIEBA represents nearly 140 of the largest corporate pension funds in the United States. Its membership consists of corporate financial officers who administer and manage the investment of over $1 trillion in retirement plan assets.

“We think it is bad pension policy,” Schub said. “We also think it’s bad economic policy.”

Last year the Senate passed a pension bill with language to make companies with poor credit ratings such as General Motors Corp add cash to their plans. But many employers opposed the proposal and lawmakers began looking for an alternative.

Reuther said a key issue in any new set of pension rules would be how the lawmakers treat credit balances. These are balances which companies accumulate by putting more money into a plan than required in a given year to meet obligations to retirees. They can then can be assumed to grow at a higher rate of interest than the actual return.

Some analysts call these balances “play money” that make pensions plans look better funded than they are. But employers defend them as the result of legitimate efforts to play by the existing pension accounting rules.