BAILING OUT

And recent data gives some credence to their alarm. In 2004, the Committee on Investment of Employee Benefit Assets (CIEBA), which represents more than 110 of the biggest U.S. pension funds, studied the potential impact of just one of the proposed changes–using an unsmoothed yield curve to calculate plan liabilities–and discovered that corporate contributions would become two to three times more volatile. "The magnitude of that increase in the volatility of funding is huge," says Kimberly Walker, the current CIEBA chair and president of Qwest Asset Management. In addition, 45% of the CIEBA members surveyed as part of the study said the use of a yield curve would cause them to move more of their assets from stocks into bonds, which plan sponsors see as a more expensive way of funding long-term liabilities since the potential for return on the investment is lower. That move to fixed income-laden portfolios could prompt reductions in benefits over the long haul, survey respondents said.

While the changes in the funding rules are the biggest sticking point for plan sponsors, they also voice concern over the administration's proposal that they use the corporate bond yield curve to measure liabilities. Companies would measure their benefit exposure for workers near retirement using short-term bond yields and their liability for younger workers using long-term yields. Since short-term yields are usually lower than long-term yields, and a lower yield produces a higher liability, using a yield curve would translate into bigger liabilities for companies with lots of older workers. The Employment Policy Foundation estimates the proposal could boost reported plan liabilities by 3.5% for workers who are 55 and older and by 2% for workers from 50 to 54.

In addition, while current rules generally don't impose penalties on plans as long as they're within 90% of their funding target, the administration wants plans to be 100% funded and would give them seven years to achieve that. The Bush proposal also sets stricter funding targets for less financially stable companies, based on the rating assigned to their debt by credit rating agencies, and would also use credit ratings as a factor in determining the variable premiums that PBGC currently charges underfunded plans. Organizations like CIEBA worry about relying on the credit rating agencies, given criticism that the agencies have conflicts of interest and are slow in picking up changes in companies' conditions. And some groups suggest that subjecting non-investment grade companies to more onerous conditions has the potential to push such companies into a downward spiral.

A COSTLY REPAIR JOB

The Bush proposal also boosts the flat per-participant premium that plans must pay the PBGC each year to $30, up 57.6% from the current $19. Although the premium has not been increased since 1991, detractors accuse the administration of heaping yet another financial burden onto the nation's biggest plans at a time when many can ill afford it. "The proposal is around protecting the PBGC," says Ari Jacobs, leader of the East region retirement practice at benefits consulting company Hewitt Associates LLC. "There should be a larger effort here around protecting DB plans and recognizing their importance." CIEBA's Walker adds that while the proposed changes might make benefits more secure for the workers remaining in traditional DB plans, "retirement security overall we think will be much less, because you'll have fewer participants in the system as corporations react to [the changes in funding rules] and shut down plans."

Yet not everyone thinks the Bush administration is being too tough; there are also critics who accuse the White House of not going far enough to ensure that plans remain funded by Corporate America and not by the American public. Robert Clark, a professor of economics and business management at North Carolina State University in Raleigh, questions why taxpayer money should be used to fill funding gaps for a single type of retirement benefit that is enjoyed by so relatively few Americans. Current statistics say only 23% of workers have DB plan coverage. "You would be transferring resources from everybody else in society to a few firms in traditional or declining sectors of the economy," says Clark.

Jeremy Gold, an actuarial consultant, takes an even sterner position, arguing that by some date set by the government, the administration should insist that all plans be fully funded on a termination basis–which includes not only the cost of future benefits, but of terminating the plan and purchasing a group annuity. "I would require of U.S. defined benefit plans the same things we require of banks, investment banks, insurance companies: We want you to have more assets than liabilities every day you're open," Gold says.

Gold also wants companies to measure their liabilities with risk-free Treasuries, rather than corporate bonds, to eliminate any risk that bond defaults could cause a plan to come up short of its promises to workers. He suggests that it makes sense for pension plans to invest in bonds, rather than stocks, to avoid the risk of a mismatch between assets and liabilities. And in fact, the volatility in contributions that employers see resulting from the Bush proposal could encourage companies to move to bonds as a defensive measure.

One possible irony: Even if corporate plan sponsors beat down the Bush plan, companies may still be faced with more volatility–thanks to the Financial Accounting Standards Board (FASB), which seems set on pushing companies to begin to value all their pension investments according to their current worth in the market. Pension experts predict that the FASB's preference for such "fair value" accounting is likely to result eventually in a requirement that companies mark to market their pension plan assets.

A number of organizations are coming out with their own proposals in response to the Bush plan. ABC recommends sticking with the current funding rules, but permanently substituting a corporate bond rate as the measure when calculating deficit reduction contributions. Others suggest bolstering the PBGC by clearing up the legal uncertainty surrounding cash balance plans so that companies would be able to convert a DB plan to a cash balance plan. (Cash balance plans are also insured by, and pay premiums to, the PBGC.) The administration says one of its goals is to clarify the legal situation of cash balance plans, but so far it has only reiterated an existing proposal that includes a five-year "hold harmless" provision that employers oppose.

But if the administration's proposed changes result in widespread closings of DB plans, that could create a fresh threat to the welfare of the PBGC. Such closings cut into the revenue the PBGC gets from premiums. Perhaps more importantly, since it's the healthiest plans that are most likely to have the financial wherewithal to close, a mass exodus from the DB system could leave the PBGC insuring a pool of less healthy plans. "What the PBGC could be left with is all the sick plans," says CIEBA's Walker. "You could have adverse selection."

IN NUMBERS THERE IS STRENGTH

Gregory calculates that the PBGC would already be taking in 60% of the premium increase it is seeking in the Bush proposal if defined benefit pension plans still had the same number of active employees that they did in 1980. "Their best assurance over the long term is a healthy system with lots of folks in it," she says. "If you keep focusing on creating a riskless PBGC, you wind up driving everybody out."

Congress has to deal with at least one element of DB plan funding this year, the liability rate used to calculate deficit reduction contributions, because the law that authorized use of a blended corporate rate expires at the end of 2005. But it's not clear that it will manage to pass comprehensive reforms. "Doing complex pension reform legislation tends to be very time-consuming," says Judy Schub, managing director of CIEBA, who's skeptical that comprehensive legislation will be passed this year. She notes that the president's efforts to reform Social Security could hinder the work on pensions, since the topics involve many of the same players on the Hill.