Congress is again considering whether to provide contribution relief to corporate sponsors of defined benefit pension plans. According to the Pension Benefit Guaranty Corp., Congress has already provided various forms of contribution relief at least six times since 2002. We believe that Congress should rebuff the lobbyists from the American Benefits Council, U.S. Chamber of Commerce and the others who support contribution relief because this does nothing more than bail out companies from the consequences of their own decisions.
Pension deficits — and the future contributions necessary to close these deficits — have grown primarily because the interest rates used to calculate pension liabilities have fallen. Lower interest rates result in higher value of liabilities and, for some companies, a larger pension deficit. And just a reminder: Pension deficits are the current value of the amount of money that companies have borrowed from their employees.
However, falling interest rates do not, in and of themselves, lead to larger pension deficits and required contributions. Companies made choices in the past, and continue to make choices, which expose them to falling interest rates and underperforming equity markets.
Choice 1: Companies decided to borrow from employees by granting benefit accruals and not fully funding them.
Choice 2: Companies maintained underfunded plans with deficits and minimized the amount of money that they would need to contribute to their pension plans over time. They minimized contributions by putting in the minimum required by law (which prior to the 2006 passage of the Pension Protection Act was very low due to weak contribution rules).
Choice 3: Companies chose to invest their pension assets aggressively in equities, hedge funds and other assets, rather than in lower-risk assets that match their pension liabilities.
Companies made these choices, like any other business decision, to maximize profits for their shareholders. Some companies chose to not borrow from their employees via the pension plan and also deployed their assets to protect against the risk of falling interest rates. These companies have not ended up with large deficits and the requirement to make large contributions at a time when it might be uncomfortable to do so.
Supporting more contribution relief now will encourage continued risk taking by companies regarding their pension plans. The companies that chose to take this risk should not now be allowed to defer the repayment of the debt that they owe their employees. If the “winners” in more contribution relief are this type of company, then the “losers” are; the employees of companies that eventually go bankrupt, healthy companies whose PBGC premiums will likely increase and the taxpayers who will ultimately need to bail out the PBGC's $26 billion deficit.
Ryan McGlothlin is a managing director at consultant P-Solve in Boston and Daniel Cassidy is a managing director at consultant P-Solve Cassidy, Concord, Mass.