Executives of corporate defined benefit plans who've gone to Congress before to seek funding relief are preparing to make another request.
The latest bid is spurred by the effects of the Federal Reserve's low interest-rate policy, which has led to soaring pension liabilities.
On Jan. 25, Federal Reserve officials announced their decision to keep the federal funds rate at what they acknowledged are “exceptionally low levels” of zero to 0.25% at least through late 2014. The prospect of three more years of flat federal fund rates has pension plan sponsors gearing up to ask Congress for relief from soaring corporate pension liability calculations driven by those rates.
Employer groups are working on proposed legislation with two main elements — to allow segment discount rates to be based on average interest rates of the preceding two years, as long as the segment rate is within 10% of a preceding 25-year average; and to lengthen amortization periods for unfunded shortfalls of plans between 80% and 100% funded to 15 years from the current seven-year time frame.
According to an analysis by the American Benefits Council, Washington, the seven-year amortization periods dictated by the Pension Protection Act of 2006 were appropriate when it passed in 2006, “but the last few years have opened everyone's eyes to the dramatic volatility that is possible with respect to funding obligations and the markets. Seven-year amortization created unmanageable obligations following the 2008 downturn and is threatening to create even more unmanageable obligations for 2012 and subsequent years. If the PPA's amortization period has created multiple severe problems in just a few years, we need to learn from that.”
Pension executives are worried enough now to at least plant the idea of funding relief before a Congress distracted by federal budget deficits and upcoming elections. They've been there before: Past efforts were caused by funding constraints and interest rates dictated by the PPA that were exacerbated by the financial crisis, forcing companies to make tough choices with their limited cash.
While a few legislators are sympathetic, legislative aides say it will take awhile to build the pension funds' case.
An opening bid for attention came at a Feb. 2 hearing of the House Subcommittee on Health, Employment, Labor and Pensions. “The actions by the Fed to control interest rates potentially put a significant near-term burden on sponsors of defined benefit plans, something that the Fed has acknowledged,” testified Gretchen Haggerty, executive vice president and CFO for United States Steel Corp., Pittsburgh. Ms. Haggerty also chairs the U.S. Steel and Carnegie Pension Fund, Pittsburgh, which had an estimated $6.475 billion in assets as of Sept. 30, according to Pensions & Investments data.
Pension plan executives calculate their liabilities by discounting projected future payments to a present value based on corporate bond rates tied to the Fed rate. That bond rate is dictated by the PPA, which requires plans to use an interest-rate yield curve to get the rate for calculating pension liabilities and minimum funding requirements. The liability rate is inversely proportionate to the interest rate — the lower the rate, the higher the liability and funding demands.
“Plan sponsors need more predictable funding requirements for budgeting purposes and for managing cash flow,” Deborah K. Forbes, executive director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md., wrote in an e-mail. Members of CIEBA, which represents more than 100 of the largest U.S. corporate pension plans with a combined $1.5 trillion in defined benefit and defined contribution plan assets, “want to fund their plans responsibly but, with interest rates being kept at artificially low rates, plan funding obligations are overstated.”
The low rates “are creating an artificial funding crisis,” agreed Ken Porter, a former chief actuary of the E.I. DuPont de Nemours & Co., Wilmington, Del., and former director of the American Benefits Institute, Washington. Mr. Porter told the House subcommittee members that, contrary to the Federal Reserve's objectives for stimulating the economy, the increased funding demands from lower interest rates threaten to divert money from job creation and tax revenue into pension funds that “will be vastly overfunded in a few years when interest rates return to normal.”
For a typical pension plan, Mr. Porter said, the effective interest rate required by law has dropped roughly 70 basis points since 2011, pushing liabilities up 10%. For a plan with $7 billion in liabilities, that creates a $700 million shortfall that forces the company to put an additional $119 million into the plan for each of seven years, even while benefit payments have not changed.
Proponents stress that it is not funding relief that they seek, but rather “funding stabilization.” Their strongest argument is jobs. U.S. Steel's Ms. Haggerty said her company's capital investment program calls for spending $1 billion annually in 2011 and 2012 on new facilities that would create thousands of jobs and boost the local economy, but those investments “could take a back seat to our pension funding demands in this current low interest rate environment.”
Speaking for her company and as a member of the ERISA Industry Committee, Washington, Ms. Haggerty warned that without congressional action, “the economy will continue to disappoint and underperform.”
Ms. Haggerty noted that in 2009, while the company lost $1.4 billion, cut costs and idled five steel plants, “we still made a $140 million voluntary pension contribution.” That made the plan 101% funded, but “if we had used today's exceptionally and artificially low interest rates resulting from Federal Reserve policy,” it would have been only 85% funded.
The key argument for funding relief they have is that fewer tax-deferred dollars going into pension fund coffers means more tax revenue for the U.S. Treasury, with some estimates as high as $10 billion.
Between asset losses and higher unfunded liabilities, pension plans are getting hit from both sides, Jon Waite, director of investment management for the institutional group at SEI Investments Co. in Oaks, Pa., said in an interview. “The (Fed) put the pension sponsors in a very difficult position. To hedge out the interest rate has become extremely difficult.”
That reality is starting to get sympathy on Capitol Hill, where a Senate proposal to stabilize pension funding rules was recently added to a fast-moving highway funding bill. Sen. Tom Harkin, D-Iowa, who chairs the Senate Committee on Health, Education, Labor and Pensions “is committed to making sure pension funding rules are working well,” said an aide who did not want to be identified.
