Relief bill for companies would cut employee payouts
By Kimberly Blanton, Boston Globe Staff, 6/4/2003
Pending federal legislation would reduce by as much as one-third the lump sum payments that millions of Americans are eligible to take from their employer pension funds when they retire, change jobs, or are laid off.
The proposal, part of a sweeping pension overhaul bill, is intended to give relief to companies burdened with heavy stock market losses in their pension funds, losses that exceeded $100 billion last year. Federal law requires that they increase contributions to the funds to close the growing gap between what they will be obligated to pay retirees in the future and the investments funding those benefits. In a weak economy, many companies say they are straining to pay rising contributions.
A little-noted side effect of the proposal would reduce payments to employees covered by traditional, defined-benefit pension plans who opt to take a lump sum when they leave their employers. Defined-benefit plans cover about 23 million American workers, and at least half of them allow them to take a lump-sum option immediately, rather than receive a monthly pension check later.
''We're talking about an act of Congress that could dramatically reduce your pension benefit 10 percent, 20 percent or more,'' said David Certner, director of federal affairs for AARP, a lobbying group for older Americans. ''This is a huge, explosive issue - billions of dollars we're talking about, not just this year but forever.''
Corporate America - with rare backing from labor unions - is pushing the legislation to shore up underfunded pension funds. Mostly because of a bear market in stocks, pension contributions by Standard & Poor's 500 companies tripled in one year, to $46 billion in 2002, according to Credit Suisse First Boston.
Using a higher interest rate in a mathematical formula to estimate future retirement benefits would immediately shrink corporate pension obligations and decrease their required contributions. If the rate is increased permanently in corporate calculations of liabilities, that same rate would also apply to lump-sum calculations.
Critics say corporations are overstating the severity of the problem, noting that many Fortune 500 companies have had growing pension-fund liabilities for years. Smokestack industries and airlines have some of the biggest liabilities. Indeed, the health of corporate pension funds waxes and wanes with the market's ups and downs. Many companies took
''contribution holidays'' when stocks were booming.
Higher rates would reduce lump-sum payouts, and if interest rates rose, it would lead to further cuts. According to Watson Wyatt, a one percentage-point rise in rates translates to a reduction in the lump sum of between 8 percent and 37 percent, depending on the employees' age; the younger the worker, the greater the loss.
In recent years, many workers have seen windfalls as interest rates fell to 40-year lows and lump sums have swelled.
Three years ago, when Linda Muldoon turned 55, her employer mailed her paperwork displaying her retirement benefits. She filed the papers away: After 25 years at the Danvers offices of Osram Sylvania, and, prior to that, GTE Corp.'s Sylvania division, she wasn't ready to leave her data-entry job. Facing imminent layoff last year, Muldoon was forced to accept early retirement. She obtained an updated statement in January, but by the time she retired three months later, she was surprised the value had climbed 8 percent, into six figures.
Her certified financial planner, Thomas Riquier, who is based in Danvers, attributed this largely to falling interest rates.
''What I got was more than I was going to get earlier,'' Muldoon said, declining to disclose dollar amounts. She needs every penny, too: ''I'm divorced - this is my whole pension,'' said the lifelong North Shore resident, who plans to bequeath any unspent portion to her daughter.
Riquier said falling rates have benefited many of his clients by increasing lump sum payments.
Many corporations argue that the rising cost of defined-benefit pension plans threatens to price the plans out of existence. The number of these plans has steadily declined for years, as companies shifted the risks and responsibilities of providing for retirement to workers by setting up 401(k) plans or other accounts.
According to the US Department of Labor, there were 56,405 defined-benefit plans in 1998, the most recent data available. That is one-third the number in the late 1980s.
''Without permanent and comprehensive pension funding reform this spring, the harm to our nation's defined-benefit pension system - and the millions of American families who depend on this retirement income - will be irreparable,'' Kenneth Porter, director of DuPont Co.'s benefits financial planning, testified in April before a House Ways and Means subcommittee. Porter is on the board of the American Benefits Council, which favors raising the mandated rates.
A confluence of factors has made the funding crisis acute for some companies.
''You have low interest rates driving the liabilities up at the same time the poor investment market is driving assets down, so [companies] can go from being overfunded to underfunded in a very short period,'' said Alan Glickstein, consultant for Watson Wyatt Worldwide in Boston.
Interest-rate overhaul is contained in broader pension legislation, cosponsored by representatives Rob Portman, an Ohio Republican, and Ben Cardin, a Maryland Democrat. The new interest rate would be pegged to corporate bond rates, rather than to the 30-year US Treasury bond, used currently. Corporate bonds usually carry a higher rate than government securities with the same maturity dates.
The bill also phases in an increase in rates used to determine lump sums, starting in 2006. The new rate would probably be about 1 percentage point higher than it is now.
House Majority Leader Tom DeLay, a Texas Republican, was quoted yesterday in National Journal's ''Congress Daily PM'' newsletter predicting that the bill would pass the House this month. Under corporate pressure to provide rate relief, lawmakers may attach a rate proposal to other legislation, congressional staff and lobbyists said. A temporary, higher rate now in effect expires at the end of the year; it applies only to corporate liabilities and not lump sums.
Also backing the pension legislation are labor organizations, including the AFL-CIO, which argues that smaller corporate contributions would free more money for wage increases and healthcare costs at the bargaining table.
An aide to Massachusetts Democratic Senator Edward M. Kennedy said members are seeking a compromise ''that will give relief to plans and employers,'' while protecting benefits.
This story ran on page D1 of the Boston Globe on 6/4/2003.
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