Death to Smoothing

A tough regulatory environment is another nail in the coffin for defined-benefit plans.

The recent revelation of the dire financial straits in which the Pension Benefit Guaranty Corp. (PBGC) has found itself (see “The Domino Effect“) may in fact be one of the best hopes to galvanize a cleanup of the current patchwork of Employee Retirement Income Security Act rules, which contain both loopholes and nooses for pension plan sponsors. Companies are still allowed to let underfunded plans ride on funding credits that accrued during the years they were overfunded, for example, but they get no incentive for cushioning their plans with added cash due to a ceiling on tax deductions for contributions.

A number of bills are expected to address pension-related issues. The interest rates upon which both long-term and lump-sum liabilities are calculated and the degree to which those liabilities must be covered are likely to be addressed in some form or another. Lobbyists are also pushing hard for a stamp of approval on cash-balance plans that would protect firms from employee lawsuits.

Meanwhile, the interest rates used to calculate lump-sum payouts to retirees do not match up with those used to calculate the same amounts when they are considered as annuities — and the debate over how to replace the defunct 30-year Treasury bond rate for such calculations is still raging, with last year’s Pension Funding Equity Act set to expire at the end of the year. “It’s crucial that we have a permanent solution to the temporary fix that Congress enacted to replace the 30-year Treasury rate,” argues Bill Heitmann, senior vice president of finance at Bedminster, New Jersey-based Verizon Communications Inc., who says Verizon favors using a blended corporate rate. “We need to have certainty [to determine] our pension obligations,” he adds.

But a permanent solution is an unlikely outcome. “We’ll most likely get another temporary reform measure,” says Aliya Wong, director of pension policy at the U.S. Chamber of Commerce. This would make long-term planning for pension funding all the harder.

The difference between economic and political ideals may be stark, however. Wagner and other actuaries would like to see a system in which healthy companies could keep their plans funded to a lower degree than the current minimums, allowing them more leeway in conserving cash until closer to the time when the obligations come due. “If a company is very healthy, it may not need to have its plans as well funded as those that are unhealthy, because it has the financial wherewithal to make contributions when necessary,” says Wagner.

Yet politicians are far more comfortable with the idea of requiring more money in the bank, rather than less. “Congress should require companies to fully fund their plans,” said Rep. John Boehner (R-Ohio) in a speech before the American Benefits Council. Boehner, chairman of the Committee on Education and the Workforce, wants to change laws that allow companies to skip pension payments when minimum funding levels are met.

The best-case scenario for plan sponsors, then, is likely to be a higher ceiling on the level of tax-deductible contributions a company could make in a given year, which could be helpful in future years when companies have more to contribute. “Companies should be given more latitude as to when they can fund their plans on a tax-effective basis,” says Heitmann. “That would create alignment between a company’s ability to fund and its long-term need to fund the plan.”

Given the intricacies of pension reform, the SEC investigations may ultimately be the least of pension sponsors’ worries. No one is expecting the SEC to start setting rates of return, or even mandating methodologies. Instead, the probe is likely to have its intended effect if the commission prompts sponsors “to take a good look at their own assumptions,” says Ciesielski. Adds Brian Lane, a partner at Gibson, Dunn & Crutcher LLP in Washington, D.C., and a former SEC official: “I would guess that most companies are going to be able to explain their assumptions to the satisfaction of the SEC. I don’t expect we’ll see many enforcement cases.”

But clearly, without some attention from regulators, there is little hope that keeping corporate pensions from crushing the rest of the corporation will get any easier. As it stands now, the best bet for plan sponsors is to hope for good stock market returns and higher interest rates.

Alix Nyberg is a contributing editor of CFO.


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