Human Capital & Careers

Pension Bill Now in Doubt

Pension funding ideologies clash as companies phase out defined-benefit plans.
Stephen TaubOctober 7, 2005

Who should shoulder the costs of private, traditional defined-benefit pension funds?

That question is at the center of a debate that figures to intensify as more old-line companies — such as automakers, airlines, and steel mills — have trouble meeting pension obligations. Indeed, corporate pensions in the United States are underfunded by some $450 billion, according to Reuters.

Lawmakers were hoping to pass a bill that would require financially shaky companies with pension obligations to pay a larger premium to the financially overburdened Pension Benefit Guaranty Corp. (PBGC), the fund of last resort for companies that default on pension payments. However, the legislation reportedly is stalled because two senators — Mike DeWine (R-Ohio) and Barbara A. Mikulski (D-Md.) — don’t believe that companies with low credit ratings should pay higher premiums than companies with high credit ratings.

“It’s a ridiculous provision…. When you have companies that show any sign of weakness, [why would] you beat them over the head” by toughening pension funding rules, said DeWine, Reuters reported. Mikulski added that there was no direct link between a company’s credit rating and how well its pension plan was funded. “We don’t want to pick winners and losers,” she added.

Reuters also reported that Sen. Charles E. Grassley (R-Iowa), one of the bill’s co-sponsors, made it clear that the credit-rating provision is nonnegotiable. Nevertheless, the ever-widening split means that the bill, which was expected to be voted upon last week, will likely be in limbo for the foreseeable future. “It will be somewhat delayed, and I don’t know exactly how long,” Grassley reportedly said.

Some industry players say that taxpayers should foot the tab if the PGBC is unable to pay. But critics of that idea balk, asserting that it is unfair to tax employees who work for companies without pension plans in order to guarantee that retirees of poor-performing companies with defined-benefit plans receive their pension checks.

Meanwhile, other companies are simply phasing out their defined-benefit pensions. For example, officials at Lockheed Martin, the nation’s largest defense contractor, say the company will no longer offer pensions to new salaried employees. A Lockheed spokesman told the Associated Press that the company expects to save between $125 million and $150 million after the change is rolled out during the next several years.

The wire service noted that Lockheed reported $600 million in pension-related expenses last year and expects those charges to be about the same this year. Union workers and current employees aren’t affected by the new policy, which goes into effect on January 1.