Pension funding stabilization: is Congress poised to act?

• Author: Crooks, Christina
• Position: WASHINGTON BEAT

Defined benefit (DB) pension plans provide retirement benefits to millions of workers and retirees, but companies are facing significant funding pressures in the aftermath of the financial crisis and the current low interest rate environment. More than 200 companies and associations have called on Congress to take action on a permanent solution that would stabilize funding interest rate rules; but what the future holds for this effort and businesses with DB pension plans is uncertain.

Since the financial crisis, interest rates have been kept artificially low for an extended period. Though welcome for lower borrowing costs, these rates are actually creating pressure for American businesses with DB plans, due to the way plan liabilities are calculated under the Pension Protection Act (the lower the rate, the greater the liability and potential funding requirements).

This formula, experts say, was created before the financial crisis, which few predicted, along with the prolonged period of low interest rates.

As a result of the rates and higher plan liabilities, companies have indicated they are being forced to divert funds from critical business investments--building new plants, developing new products and creating jobs--to meet the contributions.

Earlier this year, FEI member Gretchen Haggerty, executive vice president and chief financial officer of United States Steel Corp., testified before Congress on the need to address the issue, explaining that the economy could be negatively impacted if companies are forced to reduce important investments to fund higher pension contributions resulting from the low rates.

Movement in Congress

With these concerns in mind, the U.S. Senate in March passed a provision in its version of the House highway bill (H.R. 4348) to address the low rate problem by ensuring that the rates used in the plan liability calculations are within a window of 10 percent around the 25-year average, for the year 2012, but then increasing by 5 percent each subsequent year until reaching 30 percent in 2016.

Supporters of the proposal say this would more appropriately reflect the long-term nature of pension obligations and would remove distortions caused by today's exceptionally low interest rates. The Senate provision did not include part of an industry proposal that would lengthen the period for amortizing plan liabilities.

Unfortunately for supporters, the U.S. House of Representatives did not pass a similar measure. Instead...