For several years there has been a clash between the low interest rates generated by the Federal Reserve to stimulate the economy and the resulting rising pension contribution levels that have absorbed corporate cash.
As a result, corporations have been putting resources into lobbying to weaken the funding of their defined benefit plans. Now, corporate pension plan sponsors once more are asking for pension funding relief to reduce the required contributions to their plans.
Congress should draw a line in the sand and tell sponsors: “No more.”
But Congress will find the corporate appeals hard to resist. Because pension contributions are tax deductible, fewer contributions mean more tax revenue from corporate income, a boost to Congress and the administration. In the past Congress has embraced such an approach in seeking to finance a growing federal deficit. Funding relief has put corporate sponsors and Congress in an alliance detrimental to pension funding. Congress appears less interested in protecting pension plans than in raising revenue.
The latest effort would further weaken the funding requirement of the Pension Protection Act of 2006, already strained by temporary pension funding relief. In fact, corporate sponsors have succeeded in getting pension relief from Congress many times in the past decade:
c Job Creation and Worker Assistance Act of 2002;
c Pension Funding Equity Act of 2004;
c Worker, Retiree and Employer Recovery Act of 2008;
c Pension Relief Act of 2010; and
c Moving Ahead for Progress in the 21st Century Act of 2012.
In 2006, Congress adopted the Pension Projection Act, whose rules were designed to speed up funding, making plans more secure.
But three times since then, Congress has granted pension funding relief.
The American Benefits Council now is seeking further relief. On Nov. 29 it unveiled a six-point plan for “saving employee pensions.” In its first point, ABC calls for the funding stabilization rules in effect in 2012 to be made permanent, rather than expiring in 2016 as is now planned. “This alone would raise tens of billions of dollars and create tremendous job growth.”
But pension plans shouldn't be used as sources of revenue for Congress or targeted economic development programs. Keeping funding requirements at current levels wouldn't necessarily harm job creation. Under MAP 21, defined benefit plans can use rates within 10% of the 25-year average corporate bond rate for calculating their pension funding obligation. That would provide $9 billion in federal tax revenue over 10 years.
But the MAP 21 funding relief provisions bear no relation to reality, allowing plans to use artificially higher rates to discount liabilities. For contribution purposes, MAP 21 overstates funding levels and understates pension obligations. Because MAP 21 raises funding levels artificially, it allows lump-sum payments when, under market interest rates, plans would be under the funding threshold permitting such payouts.
Funding relief might aid a particular company in expanding its business operations and its employment. But overall, it would not necessarily stimulate such expansion in the economy as a whole. In fact, without funding relief, more pension contributions would flow into the capital markets to be invested by those best able to use them. Companies' contributions generally are tax deductible, reducing pension costs. But the appeal of relief to Congress is to stem the deductions and so add revenue.
The ABC blames artificial decreases in interest rates over the last several years for adding to funding obligations and contributions levels. But at the same time, the low rates over the last few years have enabled companies to borrow at a much reduced cost of capital. In addition, the Fed policy has helped drive the past four calendar years of positive S&P 500 returns, three of them in double digits. Pension plan sponsors should have benefited from the higher returns on their funds, which should have reduced contributions.
Pension sponsors can't avoid risk and they need to manage it. The low interest rates are inhospitable to their funding objectives, but they have strategies they can employ to mitigate that risk, such as better asset-liability matching through liability-driven investing. They need to keep a long-term view of their pension plans, realizing there are and will be many macroeconomic events that affect funding levels, either for the positive or the negative. n
This article originally appeared in the February 4, 2013 print issue as, "Endless funding relief".