Easing of Pension Rules Sought

Market Turmoil Deepens Impact of Employer Funding Requirement

The crippled stock market and stagnant economy have driven many companies to seek relief from a rule requiring that they keep their pensions fully funded. Four senators sought to come to the companies' aid this week, but their measure has come up short, for now.

Sens. Max Baucus (D-Mont.), Charles E. Grassley (R-Iowa), Edward M. Kennedy (D-Mass.) and Mike Enzi (R-Wyo.) on Wednesday proposed legislation for consideration by the full Senate that would waive a requirement that companies immediately fully fund their pension plans if they fail to meet certain benchmarks, even if their pensions have suffered big losses.

The Senate did not consider the bill yesterday, and an aide to Grassley said the legislators plan to bring it up again if Congress convenes in December.

A Baucus aide said that he "is still working with his colleagues to move the provisions for America's families, seniors and firms."

Pension experts said that if the measure is not eventually passed, companies would have to make up for shortfalls in their plans by cutting jobs or freezing their pensions.

"This is a very significant issue and it goes beyond just the cash flow. It actually probably goes to jobs," said Kyle Brown, retirement counsel at Arlington-based consulting firm Watson Wyatt Worldwide. "The best estimate is that contributions for 2009 are going to almost triple compared to what companies were planning on and in many cases, yes, you're talking about tens or hundreds of millions of dollars and that's going to cause companies to make tough decisions and it might cause them to retract jobs."

Some of the nation's largest companies have been lobbying Congress to ease rules that were strengthened just two years ago with the passage of the Pension Protection Act of 2006.

Under the old system, companies could go years without adding money to their pensions, also known as defined benefit plans. A string of corporate bankruptcies highlighted that flaw, and added to the deficit of the Pension Benefit Guaranty Corp., the government agency that insures private-sector pension plans for millions of Americans.

That led Congress to enact more stringent funding requirements. The new law requires companies to bring their pension plans, on a phase-in schedule, to 100 percent funding. Each year the companies must meet a certain funding benchmark until it reaches 100 percent. For 2008, the target funding percentage is 92 percent. If they don't meet that benchmark, they are forced to fully fund their pensions immediately.

Pension experts call it a well-intentioned law that ran up against an unforeseen situation. The market turmoil of the past year has erased the gains many of the companies had been making in recent years in funding their pensions.

Milliman, a global consulting and actuarial firm, found that 100 of the nation's pension plans lost more than $120 billion in value in October. Pension funding dropped to 92.7 percent, a 12-percentage point decline from the funding ratio at the beginning of the year, the firm found.

In a letter sent to congressional leaders, more than 300 companies said they would be forced to make cutbacks to fund their pensions.

"Consequently, many companies will divert cash needed for current job retention, job creation and needed business investments, and instead contribute the cash to their pension plans to fund long-term obligations due many years after the current market conditions return to normal," they wrote.

The four senators' proposal would require companies that fail to meet the target funding percentage for a particular year to cover their plans only up to that target percentage. For example, if a company failed to fund 92 percent of its pension plan this year, it would have to come up with the money to reach that 92 percent, not 100 percent.

The senators addressed other retirement issues in their proposal, including a law that requires retirees older than 70 1/2 to take money out of their defined contribution plans, such as 401(k)s, and IRAs by Dec. 31 of each year. Many retirees have been complaining about the rule because the amount they are required to withdraw is based on their balances from the previous year. In most cases, their investments have suffered losses since then, and they are now being forced to withdraw funds at a market low.

Ignoring the so-called required minimum distribution rule would result in a 50 percent tax penalty on the amount that should have been withdrawn. The senators proposed a one-year moratorium on the rule, effective for 2009.