House panel approves first pension overhaul in a decade

Jay Newton-Small

Friday, July 1, 2005 | 9:18 a.m.

A U.S. House panel approved a measure overhauling the laws governing U.S. defined-benefit pension plans, the first such proposal in more than a decade.

"The bill passed without opposition," said John Boehner, an Ohio Republican who heads the House Committee on Education and the Workforce. The 22 Democrats on the committee withheld their support by voting "present," citing a lack of information. The measure will now move to the Ways and Means Committee, where Chairman Bill Thomas of California has said he will probably add it to a large retirement-security package.

The measure gives the 29,651 U.S. companies that provide defined-benefit plans five years to fully fund them. It also increases the premiums companies pay to the Pension Benefit Guaranty Corp. to insure their plans. In addition, it sets the interest rate companies must use to measure their assets and liabilities and toughens rules governing funding and benefit increases.

Recent bankruptcies in the steel and airlines industries have raised concerns about the solvency of the PBGC, the quasi-governmental agency that insures the defined-benefit pension system. So far this year the agency, already $23.3 billion in deficit, has taken on almost $10 billion more in unfunded liabilities following the bankruptcies of U.S. Airways Group Inc. and UAL Corp.'s United Airlines.

In a statement, Representative George Miller of California, the senior Democrat on Boehner's committee, said he withheld support for the legislation "to indicate that, while they want to keep moving pension legislation forward, they do not have enough information to support or reject the Republican measure."

He said Democrats support "some aspects" of the legislation.

The Congressional Budget Office estimates that U.S. companies underfunded their pension plans by as much as $600 billion last year. To address this massive shortfall, President Bush in January proposed sweeping changes to the funding rules and penalties companies face if they don't fully fund their pension plans.

Companies such as General Motors Corp., American Airlines Inc. and DuPont Co. lobbied against Bush's plan saying it went too far and would force companies to leave the system in favor of cheaper defined-contribution plans such as 401(k)s.

Boehner said he "walked a fine line" to find a compromise "smack dab in the middle" between companies' concerns and Bush's proposal.

His measure forces companies with plans less than 60 percent funded to publicly report the state of their plans -- currently there is a two-year lag for such reports released to employees and stockholders. Bush's plan would force any company that is more than $50 million underfunded to publicly report immediately.

Bush's plan would link a company's credit rating to the penalties it faces for underfunding; Boehner's does not. The administration plan would have eliminated a system that gave companies credit for paying pension dues ahead of time. Boehner allows the use of credits only by companies that are more than 80 percent funded and doesn't allow companies to count credits when looking to raise benefits. Under both plans companies must be fully funded in order to provide new benefits to employees.

Chicago-based United, for example, relied on this accounting loophole to avoid paying into several of its plans for years before it filed for bankruptcy, only to reveal in court that the company's four plans were $9.8 billion underfunded.

The PBGC only agreed to take on $6.6 billion of United's deficits, leaving about 120,000 United Airlines workers and retirees with benefits cuts of 30 percent to 60 percent. Democrats Dennis Kucinich of Ohio and David Wu of Oregon offered an amendment that was rejected 20-25 to allow companies to continue to use their credit balances toward new benefits.

Rep. Tom Price, a Georgia Republican, offered and then withdrew an amendment creating a special exemption for the troubled airline industry, allowing them to stretch out pension payments -- the industry overall is $30 billion underfunded -- over 25 years. Boehner asked Price to withdraw it so as to avoid cluttering the 350-page legislation, though indicated it could be added as the bill moves through the House.

"We have no rifle shots in this bill and we have no industry-specific language in this bill," Boehner told reporters after the bill passed. "We are focused on comprehensive reform."

About 34.6 million Americans have defined-benefit plans and another 9.8 million have so-called multi-employer plans provided by their unions -- also insured by the PBGC. Boehner and Miller offered a joint amendment establishing a series of benchmarks for multi-employer plans that are less than 80 percent funded. A second amendment allowing multi-employer plans to collect up to 10 percent in additional emergency surcharges from contributing companies also passed with unanimous support Thursday.

Miller said he fully backed the multi-employer provisions, which represent "a carefully considered compromise by labor and employer groups."

These multi-employer are better funded, on average, than individual company plans, though the PBGC estimates they are more than $100 billion underfunded. For industries in decline such as U.S. textiles, as companies leave the system those remaining are saddled with the entire weight of the remaining participants.

Boehner also added an amendment to deal with so-called hybrid defined-benefit plans. These government-insured plans are structured like 401(k)s, allowing employers to deposit funds monthly into individual retirement accounts.

The amendment allows hybrids, which have been in legal limbo since a 2003 court ruling, as long as older workers aren't penalized. In the 2003 case, International Business Machines Corp. was forced to pay older workers $300 million in compensation when a court found that its hybrid plan was illegal because the retirement benefit for younger employees exceeded benefits granted to older employees for the same period of service.