The pension fund cookie jar

Corporate defined benefit plans, still struggling to raise funding levels, are being used, in the words of one actuarial consultant, as a cookie jar by Congress to finance unrelated federal spending.

In other words, Congress turns to the corporate defined benefit system as an accessible source for any legislation that needs funding, even if it generally makes corporate plans less secure.

The most recent example occurred on Feb. 6, when the Senate sought to vote for an extension of unemployment insurance for three months, financing the new benefits by extending the pension funding relief enacted in the Moving Ahead for Progress in the 21st Century Act of 2012, or MAP-21. Republicans as well as Democrats supported the move, but the measure failed because of objections to unrelated provisions that some senators attempted to add.

That proposal was only the latest as Congress looks to unconventional revenue sources to finance more spending without adding to the already large federal budget deficit.

Earlier in the month, a proposal would have repealed the medical device tax contained in the Patient Protection and Affordable Care Act of 2010, financing the move by extending pension funding relief.

Corporate pension fund sponsors, unfortunately, have endorsed the maneuvers to raise revenue on the backs of underfunded plans. In fact, they are encouraging the move because it will reduce required contributions to their pension plans, even though funding levels are fragile and many plans are still underfunded.

Although corporate defined benefit plans in general are fading away, the assets of the remaining plans — and amount of corporate contributions to them — still command considerable attention of Congress, providing a ready source of revenue to offset federal spending.

Congress should stop the impulsive embracing of pension funds as a source of revenue to finance federal spending. Legislators are drawn to pension funds especially in times of excessively high levels of federal spending. That impulse is undermining pension security.

At the same time, corporations should stop seeking pension funding relief.

The American Benefits Council, an employee benefits trade group of corporations, seeks to extend the Map-21 provision.

Because “pension plan funding obligations are based on corporate bond interest rates for the prior two years, and the Fed plans to keep interest rates low into 2015, the interest rates used for valuing plan funding obligations will be artificially low through at least 2016,” according to a memo, distributed by the council and written by Kent A. Mason, partner, Davis & Harmon LLP law firm and of counsel to the American Benefits Council.

Congress has been generous enough with funding relief. Throughout the past dozen years, corporations have benefited from funding relief under various measures enacted by Congress: Job Creation and Worker Assistance Act of 2002; Pension Funding Equity Act of 2004; Worker, Retiree and Employer Recovery Act of 2008; Pension Relief Act of 2010; and MAP-21.

Corporate plan sponsors haven't complained of the benefits accruing to them in lower financing costs because of what they consider abnormal rates. On the other side, when the Fed kept interest rates high, corporations never complained about the abnormal positive impact on pension obligations.

Corporations haven't complained when Fed policy of keeping interest rates low has driven the equity market to record highs during the past five years. CEOs haven't volunteered to reduce their incentive pay tied to shareholder returns, triggered by the Fed's low interest rate policy.

Map-21 rates bear no relation to reality, using artificially higher rates to value liabilities. They cause pension obligations to be understated, leading to funding levels to be overstated, allowing companies to reduce contributions and jeopardize retirement income security.

Corporations should stop asking Congress for pension funding relief and instead manage risks to pension plan funding through many macroeconomic environments.

This article originally appeared in the February 17, 2014 print issue as, "The pension fund cookie jar".