Senate Passes Pension Plan Reform Bill

The Senate passed legislation Thursday that could save companies an estimated $80 billion in pension costs over the next two years -- and, perhaps more important, keep them from scrapping pension plans entirely.

The bill, which was approved by the House last week, changes the interest rate used in figuring how much money companies must set aside in their plans.

The calculation is now tied to the interest rate on the 30-year Treasury bond, which is no longer issued. Under the bill passed Thursday, the rate would be tied to an index of high-quality corporate bonds.

The bill would provide an immediate financial benefit to corporations with traditional pension plans, which are hopeful President Bush will sign the legislation before the April 15 deadline for quarterly plan contributions.

Labor groups also backed the bill, saying that without the change many companies would be tempted to abandon traditional pension plans that guarantee monthly payments.

“Without this legislation, struggling airlines could be forced by investors to terminate employee pension plans to escape or avoid bankruptcy,” said Tom Buffenbarger, international president of the International Assn. of Machinists and Aerospace Workers.

“I credit the thousands of airline and non-airline workers who contacted their representatives and demanded action to protect these hard-won retirement benefits.”

A separate provision of the bill, called the Pension Funding Equity Act, would give additional relief to the troubled airline and steel companies and to some union plans.

These plans would no longer be forced to set aside an estimated $1.6 billion to finance future pension benefits -- an obligation that some companies had argued would push already struggling firms into bankruptcy.

“Congress has taken an enormous step in saving the U.S. private pension system,” said Mark Ugoretz, president of the ERISA Industry Committee, a group that represents employers.

“Had this bill not passed, many companies would have been forced to freeze their plans.”

Bush hailed the bill’s passage Thursday and vowed to quickly sign it into law.

About 44 million working Americans are covered by traditional pensions, which pay fixed monthly fees to retirees

The bill will free up billions of dollars that can now be invested in new plants and jobs, said Lynn Dudley, vice president and general counsel of the American Benefits Council, a Washington trade group that represents big employers.

The interest rate used in pension calculations would be changed only for two years. Congressional leaders said they would need to work on more permanent pension solutions over the coming months.

“We didn’t enact a long-term solution today, as the original Senate bill proposed, but this two-year period will at least give employers a reasonable formula to use while we work on a long-term solution,” said Sen. Charles E. Grassley (R-Iowa), who is chairman the Finance Committee.

Legislators, pressed by companies to move before the April 15 deadline, broke deadlocks on a series of issues, including how much relief to provide to multi-employer plans. These are plans, typically sponsored by unions, that cover actors, construction workers and others who may have several employers in the course of a year.

The Bush administration had criticized earlier versions of the bill, which provided relief to a vast number of these multi-employer plans, saying that it could lead to companies failing to set enough money aside to fully fund obligations.

Legislators ultimately agreed to limit the number of multi-employer plans provided help under the bill, with the understanding that the issue could be revisited in subsequent legislation.

“Nothing better illustrates the attitude of this administration -- the big guys get the bailout, and the little guys get nothing,” complained Sen. Edward M. Kennedy (D-Mass.), in a statement.

“When President Bush signs this bill, he should dress up as Marie Antoinette and say to the 10 million small-business employees left out of this legislation, ‘Let them eat cake.’ ”

Pension laws require companies to hold reserves equal to the amount they will need to fund future obligations. A key factor in that calculation is the interest rate that’s used to “discount” those obligations. The lower the rate, the more companies have to set aside today to fund that future cost.

Because the 30-year Treasury bond stopped being issued three years ago, pension calculations are tied to a security that is scarce and becomes a shorter-term instrument with each passing year.

That combination keeps the bond’s price high and drives down its yield -- thus lowering the interest rate used in pension figuring.

As a result, companies have complained that they have been forced to put billions of dollars more into their plans than would be required if the law used an interest rate that wasn’t “broken.”