Pension industry lobbying has so far failed to remove or significantly change parts of a pension reform bill corporations find objectionable and likely to be extremely costly.
The bill, voted out of the House Education and Labor Committee this month and the House Ways and Means Committee in July, mandates use of a common mortality table and more conservative interest rate assumptions. It is likely to become law this year.
A representative of one industry trade group said some companies have calculated the bill could add millions of dollars to their pension costs in 1995 and substantially increase their pension liabilities.
Pension lobbyists and benefits consultants suggest the Clinton administration is pulling out all of the stops to ensure Congress passes the legislation - designed to put the Pension Benefit Guaranty Corp. on a firmer footing - before the session ends sometime in October. That's because any rise in interest rates could make it much harder for the administration to push the bill through next year. Higher interest rates would shrink companies' pension liabilities and make the PBGC's cries for fiscal help less threatening.
"The administration will not get a better deal next year because interest rates are going up," suggested Frank McArdle, manager of the Washington office of Hewitt Associates, a benefits consulting firm. An increase of one percentage point can reduce pension liabilities 15% to 20%, he noted.
General Motors Corp. reported last week that if interest rates remain at their current level for the rest of the year its pension liabilities will fall by $7 billion.
As Pensions & Investments went to press, the bill - The Retirement Protection Act, or H.R. 3396 - cleared the two committees and looked like it might fly through Congress as an ornament on sweeping trade legislation ratifying the General Agreement on Tariffs and Trade.
But employer groups say the legislation could give even some financially solid companies another reason to abandon traditional pension plans.
Besides mandating more conservative interest rate and mortality assumptions, the legislation would give the PBGC greater enforcement powers to stop mergers, acquisitions, divestitures and other corporate restructurings if a corporation or any of its affiliates involved in the transaction had unfunded pension liabilities exceeding $50 million.
As a concession, however, the legislation is likely to let employers continue to offer age-related and service-linked retirement plans by preserving an Internal Revenue Service provision known as cross-testing. The procedure makes it easier for employers to prove their plans are non-discriminatory even if they do favor older, more senior and better-paid workers. An earlier version of the legislation would have effectively killed such plans by eliminating cross-testing.
Furthermore, plan sponsors can also be thankful the House Education and Labor Committee did not yield to pleas from the American Association of Retired Persons and pension activists to require the PBGC to insure annuities by insurance companies. Typically, employers buy annuities either to replace promised benefits when they shut down their pension plans or to get rid of their pension liabilities for some employees.
As of last week, various House committees still were trying to meld the two versions of the legislation already passed into an acceptable compromise that could be attached to the House version of the trade legislation. Senate committees with jurisdiction over the PBGC had not yet acted on the legislation.
Pension sponsors object most to the interest rate and mortality assumption provisions.
Under current law, companies must calculate their pension liabilities at least once a year using a wide range of interest rates tied to an index linked to the rate on the benchmark 30-year Treasury bonds. The pending legislation would squeeze the range of rates pension plan sponsors can use; the House Education and Labor Committee version of the bill passed two weeks ago would give companies more leeway than the earlier version adopted by the House Ways and Means Committee, but employer groups insist any tightening of interest rates is unacceptable.
" It is going to cost many, many companies hundreds of millions of dollars each as a result. We have reports it would cost upwards of $400 million in 1995 or 1996 for one company, and we have several other companies reporting pension costs increasing by $100 million or $200 million as a result of the interest rate assumptions," said Mark Ugoretz, president of the ERISA Industry Committee, a Washington trade group representing many of the country's largest corporations.
A senior administration official speaking on condition of anonymity indicated a compromise between the two House versions of the bill is likely.
Another sticky point in the legislation, lobbyists representing employers say, is a provision that would mandate a standardized life expectancy table to be used by all employers. The new table undoubtedly will boost pension liabilities by more realistically predicting workers and retirees will live longer, in keeping with the trend for the nation as a whole.
"The problem with the mortality table is it doesn't fit the demographics of a lot of companies," noted Lynn Dudley, director of retirement policy at the Association of Private Pension and Welfare Plans, a Washington trade group. But a PBGC official speaking on condition of anonymity noted even the Big Three auto companies - whose workers have presumably undergone similar work stresses and could be expected to live to about the same age - have very different predictions about how long their workers will live.
Using the standardized life expectancy table, the PBGC figures about 15 out of 1,000 automobile workers would die at age 65. Ford Motor Co., however assumes more than 17 of every 1,000 of its workers will die at that age. Chrysler Corp. predicts nearly 25 workers out of every 1,000 will only live until age 65. General Motors Corp. - which has the biggest pension funding shortfall of any American company and therefore has a vested interest in assuming its workers won't live long - projects more than 32 out of every 1,000 workers won't live to collect a pension if they retire at the traditional age.
Nonetheless, in a major concession, the House Education and Labor Committee, in its version of the bill passed two weeks ago, said plan sponsors could use a 1983 version of the standard life expectancy table - which is more lenient than a current version - until the end of the decade, and asked the Treasury Department to take into account any other independent studies on life expectancies when it prepares regulations based on more updated tables.
The administration source anticipates the final legislation will include this provision.
"The key element is we've gone to a mortality table that is independent rather than letting plans choose their own, and then you're arguing over which one" it should be, he said.
Also, the Education and Labor Committee version of the PBGC bill would let companies use their own tables to predict life spans for disabled workers in 1995. But in 1996, companies would have to adopt special tables prescribed by the Treasury Department which adhere to Social Security's definition of permanently disabled workers. This, too, is likely to be included in the final bill.
A third provision in the bill would give the PBGC the right to prevent corporate restructurings affecting sponsors with plans underfunded by more than $50 million. Lobbyists and benefits consultants say $50 million of underfunding is nothing for huge corporations with billions of dollars in pension assets.
"If you are $50 million down in your financing, you have to give the PBGC a look in advance of all corporate acquisitions. For some companies that are handling a lot of little routine things, they will now be subject to bureaucratic scrutiny," said Henry von Wodtke, director of research at Buck Consultants Inc., New York.
But administration officials suggest employers may be complaining too loudly for no reason. After all, the PBGC estimates the provision would impede fewer than 30 financial transactions a year.
The final version of the legislation might narrow the provision so it affects only companies with severally underfunded plans.