Stung by outsize investment losses, some of the nation’s biggest companies are pushing Congress to roll back rules requiring them to put more money into their pension funds, just two years after President Bush signed a law meant to strengthen the pension system.
The total value of company pension funds is thought to have fallen by more than $250 billion since last winter. With cash now in short supply for companies, they are asking Congress to excuse them from having to replenish the required amounts.
Lawmakers from both parties seem receptive to the idea, and there was talk of adding a pension relief provision to the broad fiscal stimulus package Congress considered for this week’s lame-duck session.
Late Wednesday, several senators announced that they had reached agreement on a bill that would provide pension relief. Even if it is not completed this week, some Congressional leaders say they will seek support for a pension relief bill in January.
“Congress needs to make the funding less volatile,” said Representative Earl Pomeroy, Democrat of North Dakota, who has long been outspoken on pension issues. “I believe that taking this step will save thousands of jobs without costing the Treasury anything.”
The risk of giving companies a break on their required contributions is that some troubled companies may go bankrupt anyway, and the federal government will have to take over their ailing plans. Though the government insures traditional pensions, its insurance is limited. And when it takes over a plan, people can lose benefits.
Pension relief for companies would also expose the Pension Benefit Guaranty Corporation to greater risk. The federal guarantor is already operating at a deficit.
Companies do not dispute the risks, but they say that when Congress tightened the pension rules it did not take this year’s unprecedented market turmoil into account. If companies are now required to put new money into their pension funds, they say, they will not have the cash needed for business investments and payrolls.
“At a time when companies desperately need cash to keep their businesses afloat, the new funding rules will require huge, countercyclical contributions to their pension plans,” a group of more than 300 companies, trade associations, consulting firms and labor unions wrote in a letter sent last week to the senior members of the House and Senate committees that deal with workplace matters.
On Wednesday four senators announced a measure for consideration by the full Senate on Thursday that would give companies more time to make up investment losses and sort out other problems. The bill was backed by Senators Max Baucus, Democrat of Montana; Charles E. Grassley, Republican of Iowa; Edward M. Kennedy, Democrat of Massachusetts; and Michael Enzi, Republican of Wyoming.
The Pension Protection Act of 2006 was enacted in response to a string of big corporate bankruptcies and pension failures at the beginning of this decade. Federal law requires companies to put money into their pension plans on a regular schedule, but the bankruptcies revealed gaping loopholes that were allowing companies to go for years without adding money.
The 2006 amendments were intended to close some of the loopholes and make the pension system less risky. Until this year’s market disaster, most company pension funds had been making great gains.
In 2002, the last low point for most pension funds, America’s 500 biggest companies reported an aggregate pension deficit of more than $200 billion, according to David Zion, an analyst at Credit Suisse who specializes in decoding pension numbers. Thanks to company contributions and strong investment gains, the group reported a pension surplus of $60 billion at the end of 2007.
Data including this year’s losses will not be available until the next batch of annual reports, but Mr. Zion estimates that this same group has lost almost $265 billion since the beginning of the year. Results are likely to vary from one company to another because pension investment strategies can vary greatly. But Mr. Zion said he thought that of these 500 pension funds, more than 200 were now less than 80 percent funded, meaning they have less than 80 cents for every dollar of benefits promised.
The so-called funded ratio matters greatly because the new rules call for companies to bring their plans up to 100 percent funding in seven years, starting this year. The phase-in schedule expects them to be at least 92 percent funded this year, at least 94 percent funded next year and so on.
Lawmakers wanted to reduce the Pension Benefit Guaranty Corporation’s exposure to the stock market, so they wrote the law to encourage conservative investing. The law does not specifically ban volatile pension investments, but if a company suffers losses big enough to throw it off the seven-year path to full funding, then it no longer gets seven years — it has to achieve 100 percent funding right away.
Some companies have started shifting away from equities, which can swing widely, but many others have not. Now those with mostly stocks in their pension funds seem likely to have tripped the penalty switch, by falling below this year’s required 92 percent funded ratio. As a result they will now have to shoot for 100 percent funding.
The letter said the required contributions for next year are rising sharply. It cited one unnamed Florida company that contributed $673,000 this year and will be required to put in more than $15 million in 2009.
Many of the companies now calling for relief have sprawling, mature pension funds with obligations so big they can dominate the companies’ own financial performance. Mr. Zion has identified nine big companies whose pension obligations are more than five times the size of their single largest liability on their balance sheets; six have signed the letter: the NCR Corporation, I.B.M., Rockwell Collins, the ITT Corporation, Northrop Grumman and the Pactiv Corporation.
The sponsor of America’s biggest corporate pension fund, General Motors, did not sign the letter. But Ford Motor and Chrysler did.
The A.F.L.-C.I.O. has not yet taken a public stand on pension relief, but consumer advocates are expressing guarded support.
“If they ask for something more than temporary, it’s not going to happen quickly,” said Norman Stein, a professor at the University of Alabama who specializes in pension issues.
The Pension Rights Center, an advocacy group in Washington, said the financial crisis had clearly shown that defined-benefit pensions were superior to 401(k) plans, which make participants bear all the market risk. The center said it would make sense to encourage companies to keep offering pensions by giving them a break on their contributions — but only if they agreed not to freeze their plans.
In a pension freeze, employees keep the benefits they have earned, but stop building up new benefits with additional years of work. Even a frozen pension fund still needs contributions, albeit smaller ones, and the companies seeking relief include those with both frozen and active plans.
Companies urging relief that have already frozen one or more of their pension plans include 3M, Alcoa, DuPont, I.B.M., Nortel, Northrop Grumman, Verizon and Whirlpool, among others.
The issue would be a flashpoint, Professor Stein predicted. “This is completely inappropriate for frozen plans,” he said. “I can’t see any reason at all to give relief to frozen plans.”