Many companies have done a remarkable job of strengthening the funding of their pension plans since 2001 in the face of a recession and adverse investment markets and interest rates.
But now many executives believe their pension plans, and even their corporate operations, are threatened by the Bush administration's pension reform proposals.
The most contentious proposals that concern executives include mark-to-market accounting, using a yield curve and shorter-term interest rates to value liabilities, and higher premiums for the Pension Benefit Guaranty Corp.
Executives fear the proposals will increase pension cost volatility, forcing companies to move pension assets more to bonds, which don't historically return as much as equities, thus increasing pension costs.
The proposals regarding marking assets to market, and the use of a 90-day average of corporate bond interest rates to value pension liabilities, would cause 30% of pension executives to favor closing their plans, a survey by the Committee on Investment of Employee Benefit Assets of the Association for Financial Professionals found.
Another 20% of respondents favored freezing accruals for current participants. In addition, one-third would reduce equity exposure by at least 15 percentage points and the rest would cut equity exposure by five to 10 points.
The administration's proposals, however, or something similar, are necessary to correct the weaknesses in pension plan funding that the collapse of the Internet bubble revealed.
The funding conventions companies have used for their pension plans since the passage of ERISA, and the accounting standards used since the late '80s, have combined to hide the true economic costs of pension plans from management, employees and shareholders.
Companies have used amortization accounting to their advantage, sometimes reporting big gains in assets and improvements in funding status from previous years, even when the existing conditions would suggest a weaker pension position.
They have also used pension income to inflate corporate earnings, when that pension income often was phantom income, presenting misleading picture of company finances.
The proposed standards are not perfect, but they seem to get closer to the true costs of funding, and make those costs more visible.
If recognition of the true costs of pension plans causes more companies to freeze or terminate such plans, so be it. That is better in the long run for the companies, the employees and the economy, than for resources to be misallocated based on misleading information about pension costs and the funded status of the pension plans.
Would creditors have lent so much money to the airlines if the true pension obligations and costs were more obvious? Would the unions have demanded the compensation packages they did? Would corporate management have agreed to the compensation packages and work rules the employees demanded? Probably not.
Given the realities of a more competitive global economy and a mobile work force, companies will continue to freeze or terminate defined benefit plans, whether or not the administration's proposals are put into place. They were freezing or closing plans under rules the administration wants to scrap.
The administration ought to concede to companies a longer time, 10 years for example, to make up for existing unfunded liabilities. But for future liabilities, tighter funding standards should apply. The administration also should relax pre-funding restrictions in the event mark-to-market accounting causes more volatility in funding requirements. That would give corporations flexibility to contribute more in flush times to build up a cushion to offset the cash-flow strain when the economy is sluggish.
Companies should make some concessions, accepting the new accounting and reporting standards. Pension plans are too big a part of corporate finances to be buried in an arcane way in financial statements.
Traditional pension plans are a valuable and efficient way to finance retirement benefits, but they shouldn't be overprotected, allowing funding and valuation methods that make it hard to analyze their true costs.
