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House Approves Legislation to Overhaul Private Pension System
July 28 (Bloomberg) -- The House of Representatives passed legislation overhauling the U.S. private pension system and requiring more than 30,000 companies to fully fund their pension plans.

The legislation, passed by a vote of 279-131, is designed in part to protect the Pension Benefit Guaranty Corp., the quasi- governmental agency that insures U.S. defined benefit pensions, which reported a $22.8 billion deficit this year.

``We're attempting to protect the American workers and the benefits they've earned,'' said House Majority Leader John Boehner, an Ohio Republican. He called the legislation the ``most sweeping changes to America's pension system in 30 years.''

The legislation may face opposition in the Senate next week, because the House altered a compromise version by leaving off $35 billion in popular tax breaks after an earlier agreement to include them unraveled.

House Republicans moved the tax cuts from the pension measure to legislation to roll back the controversial estate tax, to improve that proposal's chances for passage.

The refusal to use the compromise version of the legislation may endanger it in the Senate, which originally passed a pension measure 97-2. The new version also will be subject to amendments that could force the House and Senate back to the bargaining table. Lawmakers from both chambers had spent almost five months negotiating a final agreement before tonight's vote.

The legislation passed by the House today is identical to a measure the Senate has previously approved except for the tax breaks and language giving four airlines extra time to pay off overdue pension payments.

American

The Senate version gave AMR Corp.'s American Airlines, based in Fort Worth, Texas; Delta Air Lines Inc., based in Atlanta; Continental Airlines Inc. based in Houston, and Northwest Airlines Corp., based in Eagan, Minnesota, 20 additional years to pay off their debts.

The House version gives companies such as Delta and Northwest, which are operating in bankruptcy and wish to freeze their plans, only 10 additional years, and airlines such as American and Continental that wish to retain their pension plans three additional years along with a two-year immediate break from making payments.

Because of the change, almost the entire House delegation from Texas, home to American and Continental, opposed the measure.

``The bill debated here tonight will give Delta and Northwest a huge competitive advantage,'' said Representative Sam Johnson, a Texas Republican. ``The Senate conference report would provide parity for all four airlines.''

The bankruptcies of UAL Corp.'s United Airlines and U.S. Airways Inc., which left the PBGC with more than $10 billion of unfunded debt, helped spur action on the legislation.

$450 Billion

Companies underfunded their plans last year by $450 billion, according to the Labor Department. Many lawmakers say a multibillion dollar taxpayer bailout of the PBGC may be needed if nothing is done.

The measure would force U.S. companies to put more money into pension funds they provide for some 44 million workers.

The Bush administration unveiled a plan in January 2005 that critics said would force weaker companies to shift to less expensive 401(k) plans or terminate their plans, dumping them on the PBGC. The number of defined benefit plans has shrunk from more than 100,000 in the 1980s to 30,000 today as more companies switch to 401(k) plans.

90 Percent

The government now considers 90 percent funding to be full funding of a pension plan. Under the House-Senate agreement, companies would have three years until the clock starts ticking. After that, they must reach 100 percent funding in seven years or face penalties.

If passed by the Senate and signed by President George W. Bush, companies would have to use a lower interest rate to calculate the return on their funding investments. That will force them to put more money into the plans because future returns would be lower.

Older companies that have more retirees than workers will also have to pay more into their plans using varying interest rates -- higher rates for young workers and lower rates for older workers -- instead of a uniform rate used now.

Double Test

The proposed agreement provides a double test for determining which companies are most likely to fall short of their pension obligations and have to put more into their funds. A company would have to fail both tests to be designated ``at risk.''

A company whose pension plan is funded at less than 70 percent of its liabilities in a worst-case scenario in which every employee retires early at maximum benefits would flunk the first test. A plan funded at less than 80 percent of liabilities using standard retirement calculations would fail the second test.

A company that failed both tests would have a year to accelerated payments to pass both tests. The 80 percent test would be phased in over three years, starting at 65 percent in 2008.

General Motors Corp., based in Detroit, won a victory when a Senate provision that classified companies with below-investment- grade credit ratings as ``at risk,'' was removed from the measure. GM's bonds were cut to junk in May 2005.

GM, which has the largest private defined-benefit pension plan in the world, lost a battle to be able to count its credit balances, or money paid into pension plans early, when calculating how well funded its plan is.

Balances

Only companies that are above 80 percent funded will be able to count those balances toward quarterly pension payments. The rule will help avoid cases like that of U.S. Airways, which made no real payments into one of its plans for more than four years. The airline's plans were more than $2.3 billion underfunded when they were transferred to the PBGC.

The legislation also grants defense contractors such as Raytheon Co., Lockheed Martin Corp., Northrop Grumman Corp., BAE Systems Plc and General Dynamics Corp. three extra years to pay off their pension debt, as they cannot raise fees on their clients to increase their pension plan payments.

In a move to prompt more retirement savings, the measure also encourages companies to automatically enroll their employees in 401(k) plans, a move that could bring in as much as $1.8 trillion in new retirement savings. It provides additional tax breaks for employees who invest in Individual Retirement Accounts and clarifies rules on how pension funds can be invested.

Fidelity

Negotiators agreed to allow companies such as New York-based Goldman Sachs Group Inc. and Boston-based Fidelity Investments to directly advise employers and employees about 401(k) and IRA retirement accounts that they manage. Lawmakers argued over whether this would be a conflict of interest for the investment companies. They compromised by requiring advisers to use a computer model for 401(k) plans that calculates the best plans for employees based on their age and income and providing incentives for advisers to use a similar model for IRAs.

Another contentious point was whether to provide legal assurance for the more than 1,800 companies that have switched to hybrid defined-benefit plans, which combine the federally backed traditional plans with a more portable 401(k)-type plan.

Several companies that made the change, such as Armonk, New York-based International Business Machines Corp. and Charlotte, North Carolina-based Bank of America Corp., were sued by plan participants. In at least one case the courts ruled that the plans discriminate against older workers.

The legislation also tightens the rules around multi- employer plans, or defined benefit plans managed by unions or associations so workers in, for example, the trucking industry can move between jobs and still keep a pension. Some of those plans, which cover more than 10.5 million workers, have had severe funding problems as industries, such as textiles, have moved offshore.

To contact the reporter on this story:
Jay Newton-Small in Washington at
jnewtonsmall@bloomberg.net.
Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net
Last Updated: July 28, 2006 23:42 EDT