New Law Could Greatly Reduce Underfunding of Pension Plans
But corporate critics say costly reforms will hurt competitive edge
NEARLY 8 million workers and retirees covered by underfunded corporate pension plans should now have a more financially secure retirement.
President Clinton signed into law yesterday the Retirement Protection Act of 1994, to reduce underfunding by more than two-thirds over the next 15 years.
Some private pension plans, says Martin Slate, director of the Pension Benefit Guaranty Corporation (PBGC), a government agency that insures pension plans for 41 million Americans, have become a ``chronic, persistent mass of underfunding.''
Underfunding of pension plans shot up from $27 billion in 1987 to $71 billion in 1993. The new bill will eliminate the agency's deficit - now running at $2.9 billion - which is the result of claims that have outstripped premium revenue, Mr. Slate says.
When an employer cannot meet pension obligations, PBGC pays retirees their scheduled pensions up to a maximum of $30,682 a year - sometimes not the full amount the employer promised.
Specifically, the reforms will:
* Require companies to use more uniform life-expectancy and interest-rate assumptions in determining contributions.
* Phase out the $53 per employee premium cap that companies with underfunded plans currently pay. In turn, more risky plans will carry more of the burden. (PBGC estimates that premiums will double for underfunded plans.)
* Better inform employees about their pension benefits. Companies with plans that are less than 90 percent funded will be required to inform employees about the pension plan's financial status and about the limits of PBGC's guarantees.
* Better inform PBGC about underfunded plans. Companies will be required to provide PBGC with funding and financial information annually; and companies with underfunded plans must inform PBGC of any financial transactions, such as mergers, that could affect a plan's security.
The pension reforms were part of a bill Congress passed Dec. 1 ratifying the latest round of world trade negotiations under the aegis of the General Agreement on Tariffs and Trade (GATT). Nearly $1 billion is expected from PBGC savings, offsetting a part of the lost tariff revenues - $12 billion over five years - resulting from the GATT pact.
The Retirement Protection Act would likely have languished on Capitol Hill without GATT, some say. But because of its inclusion in the trade agreement, critics suggest that pension reforms may not have gotten the appropriate attention of lawmakers.
For example, the reforms may cost Ford Motor Company $1 billion over the next five years, says company spokesman Al Chambers, adding that Ford's pension plan has never been underfunded.
The stricter requirements will draw cash away from plant expansions and product development and will hinder competitiveness, he adds. ``We would like to see [the issue] revisited next year'' in new legislation.
Many pension plans have become underfunded, mostly as a result of low interest rates. Some experts have predicted that a rise in interest rates will take care of the problem without PBGC implementing new rules.
Secretary of Labor Robert Reich says current PBGC rules have allowed companies too much ``wiggle room'' in calculating their contributions. ``Even though the economy is recovering, companies with underfunded plans have not felt compelled'' to fully fund their plans, he says.
Underfunding is concentrated mainly in the airline, steel, tire, and automobile industries.
The first assessment of the reforms by the auto industry was that it would be ``very damaging,'' costing manufacturers $12 billion to $14 billion in the first year, says Jason Vines, spokesman for the Automobile Manufacturers Association in Washington.
Of the ``Big Three'' car companies, General Motors Corporation -
whose pension plan was underfunded by more than $20 billion as of last year - will likely feel the greatest impact from the reforms, Mr. Vines says. GM spokeswoman Toni Simonetti says there has been ``a lot of movement in the past year'' in the company's plan, including a $5 billion cash contribution.
Chrysler Corporation reduced its underfunding and expects that its pension plan will be fully funded by the end of this year, spokeswoman Rita McKay says.