Congress Weighs Proposed Fix for Pension System

After hearing testimony last week from United Airlines employees, business leaders and others, some members of Congress declared the nation’s private pension system broken and in need of an overhaul.

One fix they’re considering is known as the Pension Protection Act, sponsored by Rep. John A. Boehner (R-Ohio), chairman of the House Education and Workforce Committee.

The bill, recently introduced, is a long way from becoming law, but experts say its proposed changes -- or others along the same lines -- are vital for the 44 million Americans who have defined-benefit pensions -- the type of plan that pays monthly benefits for life. Although neither employers nor employees are enamored of every portion of the legislation, pension experts maintain that the defined-benefit pension system could slowly die if it’s not revamped.

Here’s a look at what is being proposed and how it might affect retirement wealth.

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The Basics

The Pension Protection Act would make technical fixes to current pension law, such as creating new formulas for calculating how much companies must contribute each year.

That change is similar to one previously proposed by the Bush administration, but the Boehner bill makes key concessions to industry to make pension funding requirements more predictable. Companies had complained that Bush’s original proposal would make it impossible to plan, and it had hundreds of companies threatening to freeze or terminate their plans.

The changes would have practical effects for employees, experts said.

“The first thing that employees are going to see, if the bill gets passed, is that their company will still have a pension plan,” said Lynn Dudley, vice president of pension policy at the American Benefits Council, a trade group that represents large employers. “The Boehner bill is looking at what they can do to keep employers in ... a good system.”

The legislation provides additional funding for the beleaguered Pension Benefit Guaranty Corp., a quasi-governmental entity that makes good on pension promises when companies fail. The funding would come from higher premium payments from all companies that continue to sponsor defined-benefit plans, heading off the threat of a taxpayer bailout.

“The person who is entitled to a defined-benefit plan will know that the system is stronger,” said John A. Nixon, a partner with Philadelphia law firm Blank Rome. “As a taxpayer, I will know that the system is funded by the people who are in it.”

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New Restrictions

Many companies had objected to paying higher premiums to the pension benefit agency. They contended that they were being forced to pony up for often unreasonable promises made by their competitors. When United Airlines parent UAL Corp. recently dropped its pension obligations on the agency, for instance, its archrival, American Airlines parent AMR Corp., was left shouldering a portion of the tab.

The Boehner legislation would still require healthy pension plans to pay for the sins of their less successful brethren, but it would place restrictions on poorly funded plans. Namely:

* If a plan’s assets dropped below 80% of liabilities, the company would be barred from raising pension benefits until its funding levels improved. (United had enriched pensions for several employee groups in collective bargaining agreements over the last three years, even though the pensions were sliding ever deeper into red ink.)

* If assets dropped below 60% of liabilities, the company would be forced to freeze benefits until the assets better matched the liabilities.

* Plans less than 80% funded would be blocked from paying lump-sum distributions to retirees.

Dudley acknowledged that few companies make promises they can’t keep, noting that about 90% of plan sponsors are healthy and sufficiently funded. But she said the tighter restrictions were needed to send a message.

The lump-sum rule has some employers concerned about a “run on the bank.” In the past, experts contend, some plans that were on the edge of insolvency got pushed over by nervous employees who quit early to take lump-sum distributions. When that happened, those who were left in the plan had a diminishing pool of assets to draw on.

Dudley said she feared that employees might start to bail out, particularly if they anticipated a hardship -- such as a major medical bill -- that would require a lump-sum payment to relieve. A congressional staffer said the Boehner legislation did have hardship exceptions to the lump-sum rule, which could ease employees’ fears and lessen the chance of a run on pension assets.

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Enhanced Disclosure

The legislation would also require companies to provide timely reports to participants that spell out the plan’s assets and liabilities -- stating clearly whether the plan has all the assets needed to pay promised benefits.

Under current law, employers must provide financial statements about the pension plan, but the statements are late and incomplete. They report plan assets two years after the fact, and they don’t provide information about offsetting liabilities or give any other indication whether the reported assets are sufficient to pay promised pensions, said Ron Gebhardtsbauer, senior pension fellow with the American Academy of Actuaries.

Getting more complete and current information is important for two reasons, experts say. It can provide a warning to participants that their plan is on shaky footing, so they may need to do more outside saving to protect their retirement income. It can also provide them with ammunition to pressure their employers to fund their plans, said Kevin Smith, spokesman for the House Education and Workforce Committee.

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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail [email protected]. For previous columns, visit latimes.com/kristof.