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Hold Onto Your Yield Curves It's Going To Be A Bumpy Ride

If pension plan administrators didn't already think the job was exciting enough, wait until they deal with the predicted volatility from a proposed Bush overhaul

By Staff Writer | Updated on March 01, 2005

The last few years have seen unnerving developments in the world of defined benefit (DB) pension plans: companies having to find billions to fund massive shortfalls; DB plans being shut down entirely in the wake of large corporate bankruptcies; and a $23 billion deficit at the Pension Benefit Guaranty Corp. (PBGC), the government agency in charge of regulating pensions. So perhaps it was not surprising that on Jan. 10, the Bush administration proposed a massive overhaul of the rules governing pensions, purportedly in an effort to reinforce the system’s shaky infrastructure.

What does have many corporate plan sponsors scratching their heads, however, is the likelihood that the contemplated overhaul would end up being harder to live with than the problems that prompted it. The fear: The Bush plan’s recommended rules for determining the size of annual corporate contributions would cause substantial volatility from year to year. “What companies care about more than just the dollars that are involved is the need for predictability, the need to know what their financial responsibilities will be next year, two years from now and beyond. That is an essential part of business planning,” says Jim Klein, president of the American Benefits Council (ABC), which represents major corporations on benefits issues. “To the extent that funding changes involve one more element of unpredictability, for some plans that might be what causes them to say, ‘We’re going to exit the system’ or ‘We’re going to close our plan to new hires.’”

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