Magazine article Workforce Management

Blaming Pension Rules

Magazine article Workforce Management

Blaming Pension Rules

Article excerpt

IN THE MAIL | from our readers

THE PROBLEMS WITH pension plans ("Pension Tension," September 2005) are not simply based in whether the company funds the plan annually, quarterly or monthly; the problem is in the rules created by Congress.

Start with the interest rate assumptions, which for years were based on the 30-year T-bill rate. Congress eliminated the 30-year T-bill rate, and following were years of patched-up short-term remedies attempting to address symptoms of the problem, not the problem. Pension plans, unlike defined-contribution plans, have both a minimum and maximum funding liability. These numbers are controlled by two factors: investment performance and interest rates. Simply, the higher the interest rate and investment performance returns, the less amount of money is required to fund the plan. The opposite also holds true.

During the market-up period of the 1990s, plan sponsors were very limited in terms of how much money they could fund pension plans with. It's not their fault the rules prevented them from funding plans with more money. When the markets fell along with declining interest rates, all of a sudden pension plans found themselves grossly underfunded. When you have market decline, you have business slowdowns and the system has created negative balance sheets. This, along with increasing Pension Benefit Guaranty Corp. insurance premiums, shows how the problem is compounded. So who created this mess? Congress!

Congress is afraid companies will use pension plans as a place to legally hide thousands of dollars. Not only does the company get to deduct the amount of money it uses to fund the plan, but the plan gets to keep all the earnings tax-deferred. We can't have that, so Congress puts a limit on the amount of money companies can defer and deduct based on the plan's formula. While this might be fair, it does not account for market downturns, which is what happened to pension plans as they entered the new century.

Another issue no one seems to address is how pension plans get rid of excess amounts of cash. If the plan is restricted from additional funding, one way to eliminate this problem is to increase the benefit formula. Increasing the benefit formula is not a problem, but decreasing the benefit formula is a big no-no. Why? Because this is the promise made to the plan participants when they started in the plan: that their retirement benefit would be some percentage of their average pay. …

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