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Pension obligations force hearings

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Posted: Monday, July 21, 2003 7:16 am | Updated: 1:42 pm, Thu Oct 6, 2011.

WASHINGTON - Pension accounting may sound like a subject best addressed behind closed doors by people wielding calculators. But in recent months the issue has gained more attention in boardrooms and in Washington.

Consider General Motors Corp.’s recent eye-popping $17 billion bond issue. Its stated purpose is to shore up a pension shortfall that is approaching $20 billion. Nearly 90 percent of companies that still offer pension plans have shortfalls.

In search of relief, companies are pushing for legislation allowing them to change the way they value their pension obligations on their books. The alternative, some warn, is further reduction in the number of companies offering pensions.

‘‘We are in the perfect storm of low interest rates, market losses in portfolios and a wave of retirees expected soon when the baby boomers start retiring,’’ Rep. Sam Johnson, R-Texas, said June 15 in opening a congressional hearing into the issue. ‘‘CEOs may feel the pressure to terminate or freeze pension plans because of demands on earnings.’’

The issue focuses on an obscure accounting rule: When companies count up what they’re going to have to pay their retirees in future pension benefits, they have to use the 30-year Treasury bond to figure the value of their obligations. The lower the interest rate on the 30-year, the bigger the obligations on their books.

With the 30-year Treasury near historic lows, companies are arguing for a new measure of their pension obligations.

A Bush administration proposal seeks to extend a fundingrelief provision for two more years. The provision allows companies to use a higher corporate bond rate to calculate their pension obligations when funding falls below 90 percent.

‘‘The impact will be a reduction in the legal requirement to fund,’’ said Christopher Struve, credit analyst and pension expert at Fitch Rating Service in Chicago. ‘‘That has to be an absolute positive for every pension plan in the country.’’

Under the administration’s plan, some companies could boost the rate they currently use to determine their obligations by as much as 1.5 percent.

General Motors, with nearly $100 billion in pension obligations, estimates that if it were allowed to increase its discount rate by just a quarter percentage point, it would reduce its pretax pension expense by $120 million and reduce its total obligation by $1.8 billion.

‘‘We strongly endorse replacing the 30-year Treasury rate for pension calculations with a rate based on a composite blend of yields based on high-quality corporate bonds,’’ Kenneth Porter, director of global benefits financial planning at DuPont Co., told the subcommittee Tuesday. As of Dec. 31, DuPont had $15 billion in plan assets to satisfy its nearly $20 billion in pension obligations.

The rub for many companies is the turn the Bush plan would make after the first two years. The administration is hoping that the anticipated economic rebound will erase much of the pension problem by then.

At the outset of the third year, the plan calls for a threeyear transition period that would end with a more stringent calculation standard. The eventual ‘‘yield curve’’ formula would require companies to use a series of interest rates to determine their funding requirements, depending on the age of retirees.

That part of the administration’s proposal was met with blanket hostility by those testifying Tuesday, who feared introducing yet more uncertainty to an already complicated subject.

The yield curve method ‘‘would lack the transparency and predictability of a conservative corporate bond blend and also not be as well-understood,’’ Porter said.

Some experts believe that the administration’s solitary aim for the time being is to extend the relief provision so companies’ shortfalls do not grow further.

Critics say changing the measure of pension obligations is an accounting trick that would only favor the bottom lines of large corporations. If that measure is changed, they say, pension funding provisions should be strengthened to require companies to sock away more cash for every retiree.

Whatever happens, pension backers fear that companies are looking for one good excuse to eliminate such defined-benefit plans altogether.

‘‘We are concerned that if not carefully crafted, actions taken by Congress to significantly change the funding rules at this time will result in even more defined-benefit terminations,’’ said Kenneth Steiner, resource actuary at Watson Wyatt Worldwide, in testimony Tuesday. ‘‘If this occurs, America’s workers will be the ultimate losers.’’

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