Pension changes deemed a ‘mixed bag’

WASHINGTON – Young workers, Wall Street, a couple of airlines and U.S. taxpayers could come out as winners in the pension changes made by Congress.

Some older employees, as well as truck drivers and construction workers hoping to retire early, might not fare as well.

The legislation now on the desk of the president will, if successful, prod companies to fund their pension plans properly and ensure that workers get the retirement benefits they deserve.

But the bill also reflects the reality that the traditional defined-benefit pension plan system is in decline, and the transition to new defined-contribution-style savings plans won’t be easy.

President Bush praised the bill Friday as the “most comprehensive reforms to America’s pension system in over 30 years.” He said he will sign it into law soon.

Here’s how some of the major players in the legislation may be affected:

Employers: The 30,000 defined-benefit plans run by employers are now underfunded by $450 billion, and the bill requires plans to reach 100 percent funding levels in seven years. Seriously underfunded “at-risk” companies must contribute at an accelerated rate.

The American Benefits Council, which represents companies with traditional pension plans, said the bill was a “mixed bag,” that promotes saving but could make funding requirements more unpredictable, giving plan sponsors thinking of freezing their plans another reason for doing so.

The council’s vice president, Lynn Dudley, said the bill shifts saving responsibilities onto the individual by promoting 401(k) and other defined-contribution plans. “Defined-benefit plans were sacrificed in the process and for that we are disappointed.”

The Congressional Budget Office concluded that companies will actually contribute less to their plans over the next few years as the new funding rules are phased in, but will start making higher contributions in about five years.

Two companies pleased about the legislation are Delta Air Lines and Northwest Airlines Corp., which have filed for bankruptcy and have frozen their defined benefit pension plans. Delta intends to terminate its pilots’ pension plan. Concerned that the two airlines would dump their plans, underfunded by a total of more than $10 billion, on the government, lawmakers gave them an extra 10 years beyond the seven years that other companies get to catch up.

Workers: The bill, while stabilizing a shaky system, does not ensure there will be a defined-benefit plan in a worker’s retirement future. Half the workers in private industry have no pensions, and the legislation “doesn’t do anything for that,” said Karen Friedman, policy director of the Pension Rights Center.

A Hewitt Associates survey of 227 employers last year found 29 percent were very or somewhat likely to close participation in defined-benefit plans during the year.

The AARP said workers get shortchanged in a provision that adds legal certainty to cash balance plans, “hybrids” now in legal limbo because of a lawsuit against IBM filed by employees claiming age discrimination. The bill, said the AARP’s David Sloane, “may lead to discriminatory plan designs that stop or reduce benefits for older workers.”

The Teamsters were also protesting “red zone” provisions that would reduce early retirement benefits for workers in seriously underfunded multiemployer plans.

Experts agree that young workers in particular will be big winners from provisions promoting automatic enrollment into 401(k) programs. Research by the Investment Company Institute and the Employee Benefit Research Institute found that 401(k) participation rates among low-income workers would more than double, from 42 percent to 91 percent, under automatic enrollment plans.

The typical worker doesn’t start saving through a company retirement plan until age 41, said Peter Orszag, director of the Retirement Security Project. Automatic enrollment “helps close the retirement savings gap.”

Taxpayers: The Pension Benefit Guaranty Corp., the federal agency that insures pension plans, has racked up deficits of $22.8 billion, mainly from taking over defunct steel and airline plans. The guaranty corporation now operates on premiums and interest earnings, but the concern is that a rash of terminations could result in a costly taxpayer bailout.

But most experts discount comparisons to the bailout for the savings and loan industry in the 1980s, noting that guaranty corporation liabilities can be stretched out over 30 or 40 years.

If the legislation just keeps the airline pensions afloat, the guaranty corporation, and the taxpayer, come out winners.