US aims to tighten rules on pension funding
By Dan Roberts in New York
Published: January 10 2005 18:17 | Last updated: January 10 2005 21:48
The US government plans to tighten funding requirements for corporate pensions under sweeping reforms designed to avoid an expensive bail-out of the federal insurance system.
Proposals announced on Monday would force companies to act sooner to top up under-funded schemes and penalise those in trouble by making them pay higher insurance premiums.
This is likely to have a significant impact on the troubled airline and automotive industries, where ageing workforces and declining investment returns have strained many company balance sheets to the limit.
But without reform, the government warned there was a danger of destroying the Pension Benefit Guaranty Corporation (PBGC), which was set up to protect employees when pension schemes were terminated.
In November, the PBGC reported a record deficit of $23.3bn and last week both United Airlines and US Airways sought to pass on further liabilities.
Elaine Chao, the labour secretary, said: “If nothing is done, the financial integrity of the PBGC will be compromised and the pension security of 34m workers and retirees will be more at risk.”
Further details were due to be released later but initial proposals looked more aggressive than many in the business community had hoped for.
Don Graves of the Business Roundtable said: “We are concerned that higher premiums would force the good apples, or well-funded companies, out of thesystem.”
Monday's proposals will also need support from congressional leaders who have so far been more sympathetic to the argument that companies need more flexibility when dealing with long-term liabilities.
Last year, company rules on pension funding were temporarily relaxed after heavy business lobbying.
But since the election, the White House has become increasingly alarmed by crises in the airline industry and sees reform of the PBGC as the first step in wider changes to Social Security.
“President Bush has made retirement security one of the highest priorities of his second term,” said Ms Chao. “A critical component of his agenda is ensuring that the defined benefit pension system is viable and that the promises made to the workers enrolled in these plans are kept.”
Particular anger was directed at companies with underfunded schemes which had increased promises made to employees knowing the PBGC was likely to pick up the bill.
“This administration will require employers to provide the resources necessary to make good on the pension promises they have made in the past,” added Ms Chao. “But we also propose to give employers a reasonable transition time to reach their funding targets.”
The government plans to reform how companies report pension shortfalls, aiming for more transparency and a consistent measure of liabilities.
“This administration proposes to do away with the confusion by replacing the multiple measures of pension liabilities with one basic concept,” said Ms Chao.
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