Low interest rates have led several major US trade groups to push Congress to reconsider the amount of money their members are required to feed into their pension funds — though similar requests have, in the past, helped lead to pension shortfalls such as those experienced by the flailing American Airlines.
It also comes at the same time as several major employers, including the Bank of America and General Motors, are moving away from their defined-benefit plans and moving more employees into 401(k) variants.
As reported in the Wall Street Journal, companies are reacting to a provision in the new Senate highway bill that would recompute the formula by which they would calculate their contribution to pension funds, which might reduce their required input by billions.
The trade-off is that lower contributions would also mean lower tax deductions, the result being more than $7 billion in extra taxes over the next decade. And those extra tax dollars would look good in the government coffers and would also help pay for the highway bill.
Some of the biggest players in the Beltway — Lockheed Martin, General Electric and Boeing — say that current rules require them to squirrel away too much cash for their pension obligations, rather than using the money to hire new employees or otherwise stimulate business.
The measure has slim hopes of passing but has caused much consternation with those representing the industrial giants.
Groups including the ERISA Industry Committee, the American Benefits Council, the U.S. Chamber of Commerce and the National Association of Manufacturers have said that low interest rates mean companies are already being forced to set aside too much cash for defined benefit obligations.
Defined benefit plans currently use a discount rate, based on the two-year results of a mix of bond yields, to compute their contributions. The lower the rate, the higher the contribution level; companies say the two-year time span is too short to react to spikes or troughs in interest rates.
General Electric, for instance, says that a recent 1.1 percent drop in its discount rate meant that its 2011 pension expenses jumped by $7.4 billion.
Boeing's rate also dropped by 0.9 percent in 2011.
The highway bill provision would change the discount rate to a range within 15 percent of the last decade's corporate bond rates.
Instead, that coalition of trade groups suggests those discount rates be calculated over a 25-year period and within 10 percent of the bond rate range.
Congress has already softened the rules on pension funding a half dozen-times in the last decade.
Union groups have said they support changing the formula if pension funds can still be protected, to help avoid the issue faced by companies such as American Airlines.
American, undergoing bankruptcy restructruing, has suggested it might entirely drop its existing pension plan as well as cutting 13,000 jobs.
The PBGC says American's pensions are already underfunded to the tune of $10 billion and that employees could lose a billion dollars in promised benefits if those pension plans are dropped.