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New law gives U.S. companies a break on pensions
That computation change will let companies estimate their pension fund earnings by assuming the interest rate will be near the average of the past 25 years, rather than the past two years when interest rates have been extremely low. Since they will now be able to assume that their pension investments are earning higher profits, they will be required to contribute less money from corporate coffers to make up the difference.
The government makes money because companies will make fewer pension contributions, which are tax deductible.
Employers disliked the previous system because interest rates bounce around from year to year, making pension contributions hard to plan. Business leaders also complained that low interest rates meant the old formula was forcing them to make artificially high contributions, diverting money from other priorities.
“It means we’re not going to be going out and hiring people, building more factories, giving more benefits to people” with that extra money, said Kathryn Ricard, senior vice president for the ERISA Industry Committee, which represents large companies’ employee benefit plans.
Workers should be concerned that the old requirements were hurting “to the point where they have to be more worried about their jobs,” said Lynn Dudley, senior vice president for the American Benefits Council, representing Fortune 500 companies’ benefit programs.
The Society of Actuaries, whose members specialize in assessing financial risk, estimates that the new law will cut the $80 billion in required company pension contributions this year by no more than $35 billion. That’s out of roughly $1.9 trillion companies have invested in these plans, the society estimates.
The contribution reduction would peak at $73 billion next year, but by 2016 companies will contribute more under the new law than the old one.
For now, failing to use current interest rates means “plan underfunding will worsen, threatening not only the pension system” but also the federal Pension Benefit Guaranty Corp., said University of Pennsylvania professor Mitchell. The agency’s deficit grew to $26 billion last year.
To help address that, the new law will gradually increase the $35 annual premium employers pay the PBGC for each worker and retiree to $48 by 2014. To give companies an incentive to fully fund their pension plans, it also will gradually double the additional premium that companies pay for each $1,000 their plans are underfunded, to $18 by 2015, and adjust the premium yearly to reflect inflation.
When the PBGC takes over a pension plan, it pays retirees the full amounts they were entitled to, up to an annual maximum of nearly $56,000 when workers retire at age 65.
The new system is riskier because there is no guarantee that pension funds will earn more than today’s low interest rates, said Donald Fuerst, senior pension fellow with the American Academy of Actuaries.
“I think it should make people wary,” Fuerst said, but it shouldn’t be their prime concern.
“What they should really look to is, is the company that sponsors their pension plan a financially strong company” that can weather market ups and downs, Fuerst said.
Many analysts say with such large sums invested in corporate pensions, they don’t expect the reduced contributions to have a major impact.
“Lowering contributions is not desirable, but the amount by which contributions are lowered is probably not that substantial,” said Alicia Munnell, director of Boston College’s Center for Retirement Research.
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