Corporations with dwindling surpluses in their pension funds might get some help from rising interest rates this year. But, they can forget about any help from Congress.
The new Republican-controlled Congress is unlikely to help companies stash more cash to pay future generations of pensioners by rolling back contribution ceilings imposed by changes made to tax laws in 1987.
The new Republican majority has promised to pass a bill requiring the government to balance the federal budget. Because companies get tax breaks for money they contribute to their pension funds, relaxing the contribution ceilings would mean the U.S. treasury would lose billions of tax dollars, which would widen the federal budget gap.
"Corporations with well-funded pension plans don't have a lot of sympathy," said Larry Wiltse, director of forecasting and planning services at Buck Consultants Inc. "If (lawmakers) do anything to increase the deductible limits, that will decrease revenue, and they then have to find someplace else to increase it," he said.
Hundreds of large companies have more money tucked away than they need to pay beneficiaries, but their numbers are shrinking rapidly, according to a new study by Buck Consultants Inc.
More than half of nearly 500 top U.S. companies still have fully funded pension plans on an accumulated benefit obligation basis, down from 95% in 1988, the Buck study reports (Pensions & Investments, Jan. 9). An unpredictable stock market, an aging work force combined with retrenchments of older workers and lower interest rate assumptions in the early 1990s all have eroded those surpluses, according to pension actuaries.
Rising interest rates in the past year have helped reverse some of that trend by letting companies discount future pension obligations at a faster rate. In just the last year, rising interest rates might have helped companies cut their liabilities 15% to 20%, estimates Mr. Wiltse.
But companies that would like to put away cash each year to pay future benefits still are hemmed in by the 1987 tax law changes that stop them from making tax-deductible contributions if their assets exceed 150% of their current liability.
Previously, companies could build in future liabilities into calculating how much money they could contribute.
Companies with young workers are especially hard hit by the law, which prevents them from building up reserves needed to pay future obligations. Digital Equipment Corp., for example, valiantly lobbied against the limit some years ago but failed to get broad-based support from other corporations.
"We have campaigned against it before it got enacted and after, but (legislators) have said we get revenue from it," said Chester J. Salkind, executive director of the American Society of Pension Actuaries, Arlington, Va.
"I don't think this is going to be that high up on the agenda for corporate employers," said Christopher Bone, chief actuary of Actuarial Sciences Associates, Somerset, N.J.
Now, some pension experts worry companies with depleting surpluses might be in for a shock when they realize how much they need to fund future obligations.
"My big concern is that we could see some plan curtailment in the next five years because it is an expense they have gotten used to not having," said Sylvester J. Schieber, director of research at The Wyatt Co., Washington. "If you're putting in 4% or 5% of payroll a year, you get used to it. But if you go from zero to 6% or 7% of payroll a year, it magnifies the hit," Mr. Schieber said.
The list of the largest companies with surpluses tucked away includes dozens of utilities, defense contractors and old-line industrial firms. Regulated utilities often contribute the maximum amount into their pension funds because they are able to pass on the costs to customers through state-approved rate increases, said James G. Durfee, an actuary at Towers Perrin, New York. Defense contractors also are able to recover their pension costs from federal government contracts.
Companies that did not need to contribute to their funds in 1991 and 1992, the latest year for which such information is available, included AT&T Co., USX Corp., Ford Motor Co. and almost all of the regional telephone companies.
A spokesman for Pacific Telesis Group, San Francisco, declined to comment beyond saying the company does not foresee the need to make contributions for several years. The pension fund had assets of $6.7 billion for salaried employees and $4.7 billion in its non-salaried employees' pension fund, according to its 1992 Form 5500 filed with the Internal Revenue Service.
Bell Atlantic Corp., Philadelphia, which enjoyed high investment returns on its $11.8 billion in pension assets during the 1980s, has not contributed additional money for 1993 and 1994.
"How long the contribution holiday might continue will depend on the investment returns that we experience, and how closely our other assumptions match actual experience," Joseph A. Bobrowski, executive director-benefits finance.
Consolidated Rail Corp., Philadelphia, is sufficiently overfunded that it doesn't need to worry about contributing for the next five years, said Thomas J. Conroy, director of pension assets at the $1 billion plan.