Whatever resiliency the national economy has demonstrated over the past few months -- whether we are still in the middle of a recession or at the beginning of a road to recovery -- high unemployment rates continue to restrict and delay economic growth. Lawmakers assert that the deployment of remaining 2009 stimulus funds, along with new investments in the health and energy sectors, will reinvigorate the job market. But the looming issue of defined benefit pension funding, left unresolved, could make the employment forecast look much worse before it gets better.
Employer sponsorship of traditional, defined benefit pension plans requires regular funding, a responsibility borne solely by the employer. The assets in the plan are insured by the Pension Benefit Guaranty Corp., a government agency. The Pension Protection Act of 2006, in an attempt to limit the PBGC's exposure in cases of bankruptcy, placed companies on an accelerated schedule for full plan funding.
Unfortunately, the new requirements coincided with a market-driven decline in asset values and interest rates. This not only yielded extreme and unanticipated jumps in funding obligations, it also sapped companies' financial reserves and further squeezed existing lines of credit. Some limited legislative relief was enacted as part of the Worker, Retiree, and Employer Recovery Act (H.R. 7327), which permitted pension plans to "smooth out" unexpected asset losses, provided a more deliberate transition toward full funding and extended relief from benefit restrictions. And Internal Revenue Service guidance issued in early 2009 helped other plan sponsors in terms of selecting a more appropriate month for performing certain funding calculations. However, obligations for 2009 still present a challenge for many employers, and some companies are now preparing for obligations in the hundreds of millions of dollars for 2010 and beyond. Plan freezes, normally the last resort, may mitigate the extent to which the situation worsens, but does not make up for the shortfall. Absent a company filing for bankruptcy, terminating the plan is no solution either because it immediately brings forward the plan's under-funded status. To meet these obligations while maintaining their current lines of business, companies will have few options but to redirect capital that would otherwise be used for new and existing jobs.
Lawmakers are now working on legislation to provide temporary relief from these obligations. Representative Earl Pomeroy (D-N.D.), a member of the House of Representatives Ways and Means Committee, has championed legislation that would help both single employer and multi-employer plans weather the economic storm by providing more flexibility in determining funding levels, benefit restrictions and credit balances. Similar and related provisions have been advanced as part of the 401(k) Fair Disclosure and Pension Security Act (H.R. 2989), recently approved by the House of Representatives Education and Labor Committee, and the Savings Recovery Act introduced by House Minority Leader John Boehner (R-Ohio).
Because these relief provisions are de facto revenue raisers (in that reduced funding contributions equals more taxable income), funding relief could become an attractive addition to other legislative vehicles, possibly including health care reform. Congressional hearings on this subject may begin as early as this fall. Will it be soon enough? Executives at the highest level are urging lawmakers to provide assistance immediately to stave off an economic cataclysm in the coming months. Everyone agrees that pension freezes or terminations are unfortunate business decisions. But the only thing worse than losing a pension plan is losing the job that comes with it.
James A. Klein can be reached via e-mail at info@abcstaff.org.
