Companies with underfunded pension plans are likely to borrow to cover the increased contributions required under pension reform legislation signed Aug. 17 by President Bush, a report from Moody's Investors Service said.
The report said the borrowing should not affect credit ratings because the companies will be effectively exchanging pension-related debt for contractual debt. Also, the law's 2008 effective date and transition provisions should generally allow companies to prepare themselves adequately for any additional funding requirements, according to the report.
"The reform act will likely lead to a more direct relationship between the funding status of a company's pension plan and its required pension contributions," said Rohit Mathur, Moody's vice president and a co-author of the report.
Well-funded plans will not see a meaningful change in their required contributions, and they might even benefit by being able to put additional money into plans in a "tax-efficient way," Moody's said. Companies with underfunded pension plans will redirect cash flows into those plans to avoid "at risk" designation under the new law — a designation that would require them to make additional contributions.
In 2008, companies are likely to freeze or jettison pension plans because the new law enhances their volatility and makes cash balance plans more attractive, the report said.
For a web link to the bill, go to www.pionline.com/pensionact.