House OKs bill to bolster U.S. pension system

But some Democrats fear it will lead companies to drop defined-benefit plans

December 16, 2005|By MARKETWATCH

WASHINGTON -- The House of Representatives passed legislation yesterday designed to shore up the nation's defined-benefit pension system, but backers still must resolve differences with the Senate and overcome White House warnings that the legislation isn't tough enough.

The House voted 294-132 to clear the Republican-backed bill, with 70 Democrats joining most Republicans in support after the bill's sponsors agreed to change provisions regarding future pension benefit increases and benefits for employees affected by plant shutdowns.

The changes won the endorsement this week of the United Auto Workers, reviving prospects for a bill that House GOP leaders had previously thought unlikely to hit the floor before year's end.

The bill would require employers with underfunded defined-benefit plans to catch up on contributions over seven years.

Companies also would be required to pay higher premiums to the Pension Benefit Guaranty Corp., which insures the retirement plans.

High-profile bankruptcies in the airline and steel industries have contributed to a PBGC deficit of more than $22 billion.

"Without reform, the system may very well collapse under mounting deficits," said Rep. Tom Price, a Georgia Republican and a backer of the bill.

But Democrats contended that the bill would encourage companies to drop defined-benefit pensions, once a mainstay of corporate retirement programs. Defined-benefit plans promise employees a set amount based largely on level of pay and years of service.

The White House said it backed passage of the House bill, but warned, in a policy statement issued by the Office of Management and Budget, that any final legislation must be "strengthened with respect to the level of required plan contributions and premiums that are needed to return the PBGC to solvency and avert a taxpayer bailout."

The statement said Bush's advisors would recommend a veto of any final bill that weakens pension-funding requirements.

The UAW changed its stance on the House bill after Education and Workforce Committee Chairman John A. Boehner, an Ohio Republican, and Ways and Means Committee Chairman Bill Thomas, a California Republican, agreed to modify provisions that the union had said would freeze pension credits and benefits in the General Motors Corp., Ford Motor Co. and DaimlerChrysler AG pension plans, as well as other union-negotiated plans.

The lawmakers also changed language that the UAW said would have otherwise prohibited plant shutdown pension benefits negotiated by unions.

Analysts and lawmakers had predicted the UAW's endorsement would bring enough Democrats on board to assure passage of the legislation yesterday.

In a letter to lawmakers, the UAW said Boehner and Thomas agreed to amend their pension bill by allowing pension plans to provide shutdown benefits if they are at least 80 percent funded. Also, the amendment provides safeguards that would prevent companies from "gaming" the funding level of their pensions to deliberately trigger benefit restrictions, the union said.

House passage sets the stage for negotiations with the Senate. Greg Kelly, a Washington policy analyst with Susquehanna Financial Group, sees an 85 percent chance that final legislation will be enacted by April 15.

That date marks a key deadline.

Under current law, pension liabilities are determined by a complex formula based on a mix of corporate bond rates. Effective Jan. 1, however, the formula reverts to the 30-year Treasury rate, which would require substantially larger contributions. Companies would be required to make their first quarterly contributions under the Treasury-based formula April 15, unless Congress completes work on the pension overhaul.

Yesterday's House vote, therefore, "helps the momentum and it moves the timing up" for final action, Kelly said.

Both the House and Senate bills would boost the PBGC premiums paid by companies with defined-benefit pension plans to $30 per plan participant a year, up from $19.

The PBGC is funded by employer premiums and investments. The string of high-profile pension defaults by airline and steel companies has raised worries that the PBGC could one day require a massive taxpayer-funded rescue.

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