Congress passes complex pension bill full of favors

By DON McINTOSH, Associate Editor

In July and August, the U.S. House and Senate approved what Massachusetts Senator Ted Kennedy called “the most important action to safeguard the retirement of hard-working Americans in a generation.”

The Pension Protection Act of 2006 had wide support from members of both political parties. It was Congress’ long-delayed response to several years of large-scale pension failures brought on by corporate fraud, bankruptcies and stock market losses.

Basically, the law is meant to make sure pension plans are able to pay the benefits that were promised, and to save the Pension Benefit Guaranty Corporation (PBGC) — the federal pension insurance agency — from insolvency.

But the new law does nothing to stop the overall decline of guaranteed pensions, said the national AFL-CIO in a March 2006 letter to members of Congress.

Plus, it’s crammed with unrelated measures and special favors to a handful of industries. More on that later. First, some context.

Traditional pensions have suffered significant decline since their heyday from the 1950s to the 1970s. The way the traditional pension works, employees who stick around get “vested.” Vested employees are promised a specific monthly benefit at retirement for the rest of their lives. In addition, participants aren’t required to make investment decisions.

But in 1981, a new kind of “no promises” pension was born. Known as a 401(k) because of the section of the tax code that created it, it’s basically an employer-sponsored tax-deferred investment savings account.

Traditional pensions are known as “defined benefit” because workers know exactly how their check will be computed; 401(k)s are known as “defined contribution,” because workers know only what is put in — what they get out will depend on how their investments are doing when they retire.

Some critics of the Pension Protection Act of 2006, like the nonprofit Pension Rights Center, say that because the law gets tough with employers whose traditional pensions are underfunded, Congress is only hastening the shift from traditional pensions to 401(k)s.

Since 1978, the number of defined-benefit plans plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 today, according to the nonpartisan Employee Benefit Research Institute. The U.S. Bureau of Labor Statistics finds 21 percent of workers in the private sector have defined-benefit pensions.

“We’re moving to a do-it-yourself retirement savings,” said Nancy Hwa, spokesperson for the Pension Rights Center.

Employers get a tax deduction for contributing to either kind of pension. And right now, 401(k)s look a lot more attractive to companies than the traditional pension.

That’s because with the traditional defined benefit pension, companies are taking on the risk if investments don’t do well. They’re responsible for maintaining enough assets in the fund to be able to pay out all the fund’s obligations to retirees. If stocks held by the fund drop in value, as they did for three years from 2000 to 2002, employers are legally obligated to increase contributions to the fund until they have enough to pay their obligations. And pension obligations are carried on the company’s books as a liability, affecting the company’s stock price. Defined benefit plans in the U.S. are currently underfunded by $450 billion.

Those drawbacks — plus a shift in what managers believe they owe workers, and what workers expect — have led even companies with adequately funded pensions to freeze (stop accruing benefits) or terminate (close down the plan and turn over the assets to the PBGC to pay past promises.)

The new law does nothing to change that.

What it does do is protect the PBGC.

Structurally, there are two kinds of defined benefit pensions: single employer plans and multi-employer plans. [Multi-employer plans are also called Taft-Hartley plans, because the Taft-Hartley Act of 1947 outlawed union-controlled benefit funds, requiring instead that benefit funds that take union-negotiated employer contributions be “jointly administered” by trustees from the union and the employers.]

Both types of defined benefit plans are insured by the PBGC, and the new law raises PBGC insurance premiums on both. Those premiums allow PBGC to take over payments for plans that terminate or default.

Underfunded single-employer pension plans face an even higher increase in PBGC premiums under the new law, which also shortens the amount of time they have to make up funding shortfalls.

For underfunded multi-employer plans, the new law sets guidelines for trustees to act. If they’re moderately underfunded, trustees are advised to cut the rate at which benefits are accrued. If they’re severely underfunded (what’s termed a as “red zone” designation), trustees are required to make cuts, and for the first time, can even cut so-called “ancillary” benefits that were already promised, like early-retirement benefits.

It took two years of hearings, amendments, and debate to complete the Pension Protection Act, and during that time, unions and employers of all kinds took turns lobbying and testifying before Congress.

There were winners and losers in the law, and ultimately unions were divided in their positions on it.

Some industries got special treatment.

Pentagon contractors with over $5 billion a year in sales got a three-year delay in having to implement the law.

Greyhound Bus Lines got a provision that allows it to cut benefits.

Communications Workers of America supported the law because of specific provisions dealing with Lucent Technologies.

Airlines got a longer period than others in which to make up pension funding shortfalls.

Unions representing airline workers at bankrupt Northwest and Delta supported the law, which gave bankrupt airlines with frozen pensions 17 years to make up the shortfall. Airlines like Continental and American, that hadn’t frozen their underfunded pensions, got 10 years to make up their shortfall. [Most industries got seven years, less than they had before.]

Continental opposed the bill, saying it unfairly benefited the bankrupt airlines. The Machinists Union, which represents workers at Continental and American airlines, joined them in opposing the bill.

Most unions with Taft-Hartley trusts were pleased with the bill because it gave plans greater flexibility in meeting funding requirements.

But the Teamsters opposed the law because of the “red zone” provision mentioned earlier.

The United Steelworkers also opposed the law, fearing that its stricter rules would cause its employers, which sponsor single-employer plans, to freeze or terminate those plans.

The United Auto Workers, on the other hand, supported the bill. That’s because UAW employers’ single-employer plans are well-funded, but the employers sponsoring them are in bad shape. And the final version of the law softened a requirement that pension contributions be linked to the company’s credit rating.

The final version of the bill also had the fingerprints of many individual members of Congress, including several from Oregon.

Oregon Congressman David Wu helped remove a provision that would have eliminated plant-shutdown benefits.

Oregon U.S. Senators Ron Wyden and Gordon Smith got a provision added that would allow PGE/Enron employees who lost 401(k) assets to “catch up” by increasing the amount they can voluntarily contribute to their IRAs for the next three years.

Another provision of the law aims to avoid a repeat of the Enron fiasco, in which workers’ 401(k)s were loaded with their employer’s stock. It requires 401(k) plans that contain employer stock to to let workers divest employer securities after three years, and to give them at least three investment options other than employer stock.

The new law also allows fiduciary advisers of a plan to give investment advice to participants or beneficiaries as long as their fees don’t depend on which choice participants make. The AFL-CIO criticized that provision, saying it sets up a conflict of interest.

And tucked into the law were a multitude of special favors, including the construction of a road in Montana and lowered tariffs on high-definition TV screens and fabrics made from worsted wool.

The bill passed the House July 28 by 279 to 131 and the Senate Aug. 3 by 93 to 5.

Wisconsin’s Russ Feingold, one of the five to vote against it in the Senate, criticized the bill’s increased tax deductions for IRAs, estimated to cost the federal government $66 billion over the next 10 years. A provision raising contribution limits on tax-deferred savings accounts would benefit only 1 in 16 households, Feingold said, and only 1 in 100 households with incomes under $50,000.

The bill was supported by all four Washington and Oregon senators, and all five Oregon House representatives.

Southwest Washington Congressman Brian Baird voted “present” as part of a protest against the practice of Congressional leaders holding votes on legislation before members have had time to read it. This bill, 393 pages long, was given to members of Congress two days before the vote.