GM, Delta lobby against Bush’s pension restructuring proposal

Jay Newton-Small

Monday, April 25, 2005 | 9:46 a.m.

President Bush and big companies, normally the best of friends, are on a collision course over pensions.

General Motors Corp., DuPont Co. and Delta Air Lines Inc. are among the companies lobbying against Bush's proposal to restructure the nation's pension-insurance program. The companies argue that the plan, if adopted, may damage or even destroy their private retirement plans and drive some employers into bankruptcy.

Bush's plan calls for employers to pay an additional $18.1 billion in premiums to the Pension Benefit Guaranty Corp., the quasi-government agency that insures companies' plans. The proposal would also force the companies to revalue their pension liabilities and to fully fund their defined-benefit retirement programs. The U.S. Labor Department says that employee pensions were underfunded by $450 billion last year.

"It would be devastating for the system to raise that much money" in premiums, says Annette Guarisco, executive director for federal affairs at GM, which has the largest U.S. pension plan. "For all companies, it would require an unnecessary diversion of funds from normal business operations, research and development, product development."

The battle over the pensions proposal is one of the first visible strains in the relationship between businesses and the White House. This year, Bush has pushed through Congress legislation sought by companies, including measures that curbed class-action lawsuits, rewrote bankruptcy laws and moved closer to allowing oil drilling in Alaska's Arctic National Wildlife Refuge. These followed last year's overhaul of corporate tax laws, which also had the support of business.

"It's unusual for the Bush administration to come up with a policy that businesses are so opposed to," says Julia Coronado, a senior research analyst at the human-resources consulting firm Watson Wyatt & Co. Holdings in Washington. "Because the proposal doesn't provide incentives for plan sponsors to stay in the system, it appears that keeping a healthy defined-benefit pension operating is not a priority."

The Bush administration proposed the changes after bankruptcies at steel makers and airlines in recent years helped create a $23 billion deficit at the PBGC. The changes are necessary because "the funding rules have fundamentally failed," Bradley Belt, the PBGC's executive director, said in an interview at the Bond Market Association's annual meeting in New York last week.

Increased costs

Opponents of the proposal say the increased costs would be unsustainable and may force them to abandon the pension programs that cover 34.6 million Americans, or 22 percent of the workforce. Aliya Wong, director for pension policy at the U.S. Chamber of Commerce, which has taken the lead in lobbying against the Bush proposal, says the first and most immediate battle will be to roll back a budget measure passed by the House of Representatives that included the $18.1 billion increase in premium revenue for the PBGC.

A Senate bill passed this month assumes only $5.3 billion in new revenue for the agency, and companies have launched an intense lobbying effort to have the premium increases removed or reduced when the two chambers craft final legislation.

The House numbers are "so completely unrealistic, it could do irreparable damage to an already delicate system," Wong says. "The Senate numbers aren't great either, but they are something we could deal with."

The Bush proposal raises the base premium for all companies to $30 per participant from $19, and would index future increases to wage growth. It also seeks to close loopholes that allowed companies with underfunded plans to avoid paying a fee, known as the variable premium, of $9 for every $1,000 of shortfall.

Defined-benefit plans

The number of defined-benefit pension plans -- which guarantee the level of benefits paid to an employee -- has dropped from a high of 112,208 in 1985 to 29,651 today, according to the PBGC. A 2003 survey by Chicago-based Aon Consulting of 1,000 companies offering defined-benefit programs found that 23 percent had stopped offering them to new employees or were actively considering such a move, replacing them with 401(k)s, which guarantee only the level of contributions by the employer.

"The only defined-benefit plan established in the last five years is by the United Methodist Church, and we don't even cover that," says the PBGC's Belt.

The Bush proposal could accelerate that trend, says Jan Jacobson, director of retirement policy at the American Benefits Association, a Washington-based group that represents pension plan sponsors.

'Death spiral'

The proposed increase is "so high that it would cause many of the plan sponsors to freeze or terminate their plans" and for companies with underfunded plans and low credit ratings, "what may start as a problem with a lowered credit rating could death- spiral," Jacobson says.

By raising premiums, the PBGC is relying on stronger companies to pay for the losses of less-solvent ones, Wong says. Companies that can do so will fully fund their pensions to avoid higher premiums, placing a greater burden on troubled firms that can't afford to pay off their pension debts.

"More and more employers find it difficult to sponsor a defined-benefit plan," says Ken Porter, director of corporate insurance and global benefits financial planning at Wilmington, Del.-based DuPont. "This fivefold increase in premiums isn't going to help. I can't predict what DuPont will do, but the evidence is that this environment has become more and more difficult and this isn't going to help."

Under the Bush proposal, DuPont, whose pensions are fully funded, would have to pay up to $6 million in premiums annually, an increase of $2.2 million, or 37 percent.

Bond rate

Dallas Salisbury, the head of the Employee Benefit Research Institute, a nonpartisan group that tracks pension issues in Washington, says companies fear that congressional passage of the premium increases will open the way to more stringent regulations in the Bush proposal, including requiring companies to change the interest rate they use to calculate pension liabilities.

Salisbury says the Bush administration could use a legislative tactic known as reconciliation to add the rest of its pensions proposal this fall. That is "companies' biggest problem," says Hazen Marshall, a former staff director of the Senate Budget Committee who is now a lobbyist for GM. "They don't want something rammed down their throats."

Airline exemption

The U.S. airline industry may have the most to lose from the proposed regulations. Atlanta-based Delta, the third-largest U.S. carrier, for example, has reported $8.46 billion in losses since 2000 and has about $4.8 billion in pension liabilities, with as much as $450 million more coming due this year.

"Because of funding rules, we will see a ballooning in the size of payments" due in the next few years, says Scott Yohe, Delta's senior vice president of government affairs. "It certainly will be difficult for us in our current financial condition to manage those payments."

Just last week, the PBGC agreed to take over $6.6 billion of Elk Grove, Ill.-based UAL Corp.'s United Airlines pensions. The company, struggling to exit bankruptcy, had underfunded pensions by $9.8 billion -- leaving employees with a $3.2 billion reduction in their benefits.

The airlines are pressing Congress to renew an exemption expiring this year that would allow them to continue the suspension of their defined-benefit plans and also spread out large payments due in coming years over a 25-year period. Last week, Senator Johnny Isakson, a Republican of Georgia, introduced legislation containing the proposal.

GM, whose U.S. pensions are currently $3 billion overfunded because the company issued $13.5 billion of bonds last year, is less concerned with the premium hikes in the budget than with the proposal to change the interest-rate calculation.

The rate companies use was pegged to the 30-year Treasury bond, which was discontinued in 2001. Two years ago, Congress passed a temporary measure pegging pension liabilities to a four- year bond; that provision expires at the end of this year.

As a replacement, the Bush administration has proposed calculating pension payments based on the average returns on high- grade corporate bonds and the average retirement age of plan participants -- a formula that it says will provide a more realistic picture of pension liabilities.

The move would force companies such as Detroit-based GM, which has 421,000 retirees and 163,000 employees, to value shorter-term pension obligations with lower yielding, shorter- term bonds.

Balance sheets

Such a move would complicate balance sheets. "You'd have to value your liabilities with different interest rates depending on how old or how young your plan participants are," says Marshall, the GM lobbyist.

The four-year corporate bond "allows pensions to use a rate higher than current market rates which means when the rule changes they'll have higher liabilities because they'll have to use a lower rate," says David Bianco, head of U.S. Valuation Accounting at UBS AG.

The PBGC, which had a surplus of $9.7 billion in 2000, now manages 1.1 million pensions taken over from insolvent companies. It will run out of money within 10 years if nothing is done, according to a study by the non-partisan Center on Federal Financial Institutions, based in Washington.

"Someone's going to have to pay for that," says Douglas Elliott, head of the nonpartisan Center on Federal Financial Institutions in Washington. "If you shift the burden to companies, they become less inclined to offer these pensions. On the other hand, if you leave things the way they are, taxpayers will have to pick up the bill."