The Domino Effect

Ailing pension plans could overburden the PBGC and send premiums soaring.

Still, some CFOs do supply their companies’ pension plans with enough assets to cover all current and future liabilities. At SAP America, White says he makes sure the company’s cash-balance pension plan is fully funded, even though the company has until September of the following year to fulfill the limit of tax-deductible contributions.

To be sure, coming up with the cash to top up SAP America’s plan isn’t as much of a challenge as it is for companies with larger fixed costs and capital outlays, White acknowledges. And since the plan is barely a decade old, the software supplier isn’t strapped with the long-standing liabilities that companies with older defined plans tend to have.

But even those companies can do more to fund their plans. Consider, for example, General Motors Corp. Two years ago, the automaker’s U.S. pension plans were underfunded by $17.8 billion, recalls GM treasurer Walter Borst, and it faced the prospect of having to contribute $15 billion in cash in the next five years in variable-rate premiums. So GM issued $13.5 billion in debt in 2003, set to mature in 20 years, and put the proceeds in the plans. That, along with other contributions, resulted in fully funded pension plans, decreasing the likelihood that GM will need to contribute to the plans for the remainder of the decade.

The move helped not only GM, but the pension system as a whole. It was, says Borst, “a beautiful deal.”

David M. Katz is deputy editor of CFO.com.

Underfunding Fixes

On January 10, Secretary of Labor Elaine L. Chao announced the Bush Administration’s plan to reform the rules governing private defined-benefit pension plans. More details were expected to be released at a later date. According to the Labor Department’s Website, the plan’s proposals cover three major areas:

1. Funding Rules.

Among other proposals, the plan would replace multiple measures of pension liabilities with one measure, adjusted to reflect risk of termination. Funding targets would be based on the plan sponsor’s financial health, and sponsors would have “a reasonable period of time, e.g., seven years,” to make up plan shortfalls. Companies with significantly underfunded plans would be barred from promising additional benefits.

2. Disclosure.

Proposals include improved disclosure of plan funding status and public disclosure of certain information regarding underfunded plans, but no further detail was provided.

3. Premiums.

All underfunded plans would pay risk-based premiums, and the PBGC would periodically adjust the risk-based rate so that premium revenue covers expected losses. Flat-rate premiums would be raised from $19 per worker to $30, reflecting the growth in wages since 1991, and would be indexed for future wage growth. —D.K.

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