WASHINGTON - Corporations with poorly funded pension plans could receive a federal bailout under a mammoth pension bill introduced by two members of the powerful House tax-writing committee.
Current law requires companies to base pension liabilities on the interest rate on 30-year Treasury bonds.
Pension liabilities rise when interest rates fall, and corporate plan sponsors - already reeling from sharp losses in the equity markets - have blamed the deterioration in their funded levels on the steep decline in interest rates on the benchmark Treasury bond since the late 1990s. They say the problem was exacerbated when the Bush administration announced plans to stop issuing the 30-year bond in October 2001.
Lawmakers last year enacted a temporary fix, allowing companies to use a higher interest rate. That law expires at the end of the year, and corporate plan sponsors say a permanent change is desperately needed.
The Pension Preservation and Savings Expansion Act, introduced earlier this month by Reps. Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., would substitute an index of long-term corporate bonds for the benchmark long bond. The interest rate on the long bond was 6.65% in January; a rate based on the index would have been 7.42%.
That could mean an 8% drop in liabilities for companies with underfunded plans, enabling them to save tens of millions of dollars they might otherwise have to shovel into their pension funds.
The legislation, H.R. 1776, is the third in a series of far-reaching pension bills Messrs. Portman and Cardin have introduced since the mid-1990s. Other provisions would:
c Make it easier for employees to sell retirement plan holdings of company stock received as an employer match - fallout from the Enron Corp. debacle;
c Allow retirees to keep their retirement savings in tax-favored accounts until age 75, instead of 70 1/2 under current law;
c Give low- and middle-income retirees a tax break of up to $2,000 for payouts from pension and retirement plans taken as annuities, and shelter the health insurance portion of their pensions;
c Make permanent the increases in limits for contributions to retirement plans and individual retirement accounts included in the Economic Growth Tax Relief and Reconciliation Act of 2001 that are scheduled to expire in 2010;
c Permit participants to make pre-tax contributions to defined benefit pension plans;
c Put higher contribution limits for retirement plans, IRAs and SIMPLE plans into effect next year, instead of over the next several years;
c Make permanent a provision giving low- and middle-income workers a tax credit of up to $1,200 for contributions to retirement plans and IRAs; and
c Let employees pay for retirement planning expenses with pre-tax money.
Sources say chances of enactment this year are slim at best. That's because the pension bill likely will be crowded off the agenda by the senators' vow to cap President Bush's economic stimulus package at $350 billion, or half of what he requested.
Plus, sources say the cost to taxpayers is likely to be far higher than the initial estimate of $110 billion over 10 years.
Nonetheless, a slimmed down version of the bill is likely to be considered by the House Ways and Means Committee and could quickly pass the tax-writing committee before getting bogged down in the Senate.
The provision substituting the long-term corporate bond index return for the benchmark long bond in calculating pension liabilities has the best chance of passing. Employers say easing funding requirements this way could save defined benefit plans from extinction.
That part of the bill resulted from frenetic lobbying by employer groups. It closely resembles a proposal first made in 2001 by the ERISA Industry Committee, a Washington-based group representing large corporations.
Rep. Jim McCrery, R-La., chairman of the House Subcommittee on Select Revenue Measures of the House Ways and Means Committee, has scheduled a hearing for April 30 to discuss the proposal. Although the Senate Finance Committee held a hearing on the issue in March, it has no plans to introduce similar legislation as yet.
If the benchmark for calculating pension liabilities isn't changed, "companies will continue to freeze plans and terminate plans because they don't see a long-term solution ahead," warned Christopher M. Bone, an actuary and executive vice president at Aon Consulting's Somerset, N.J., office. He is advising the ERISA Industry Committee and helped draft the association's proposal.
Lawmakers are expected to support that part of the Portman-Cardin bill because it would raise money for the federal government - as much as $10 billion over 10 years, according to one back-of-the-envelope estimate. That's because employers would get smaller tax deductions if they contribute less money to their pension plans.
Still the provision, which would be part of a tax package, could run into trouble if the Senate and the House fail to resolve their differences over the size of the package.
Senate Republican leaders have said they will not pass a package that costs more than $350 billion over the next 10 years, whereas Republican leaders in the House have expressed willingness to pass tax cuts costing as much as $550 billion.
"Right now, fixing the 30-year Treasury (problem) on a permanent basis is a 50-50 proposition," said Brian H. Graff, executive director of the Arlington, Va.-based American Society of Pension Actuaries.
Despite their opposition to an extension of the temporary increase in interest rates enacted last year, plan sponsors might very well have to settle for that, he said.
The proposal to replace the 30-year Treasury bond as the permanent benchmark also has encountered opposition from some pension actuaries and investment academicians, who condemn it as bad pension policy.
"This is the wrong time to be loosening pension standards," said Larry Bader, who retired as chief actuary of William M. Mercer Inc., New York, some years ago. Lawmakers, he said, "should be tightening them, not loosening them," he said.