Actuary Finds Fault with Portman-Cardin Pension Provision

May 6, 2003 ( - The new Portman-Cardin pension reform bill includes a provision that at least one critic says will allow employers with union workers to cut their pension obligations, potentially by billions of dollars.

>The provision in the pending bill by Representatives Rob Portman (R-Ohio) and Benjamin Cardin (D-Maryland) could restore employer flexibility in choosing worker mortality tables, which for the past decade have been uniformly applied to all employers.  However, at least one critic says that those tables could be used to support a notion that white collar Americans tend to live longer than their blue collar counterparts, according to a New York Times report.   The provision currently enjoys the support of the United Auto Workers and manufacturing companies whose pension funds now have assets far short of what they are projected to need under previous assumptions about worker longevity, according to the Times.

>Here’s how the provision would work: By allowing companies to assume that blue-collar workers will, on average, die before pension plan calculations now assume they will, firms could wind up with smaller pension obligations.  But the leader of the panel that developed the actuarial data on which the new provision is based told the Times that he is concerned that the data is being misinterpreted. Rather, actuary Edwin Hustead, told the Times that it was the size of an employee’s paycheck and not the color of his collar that did more to predict when the person would die.

>He complained that the current bill, the Pension Preservation and Savings Expansion Act of 2003 (HR 1776), dubbed “Portman-Cardin II,” didn’t adequately recognize that white-collar workers tend to live longer and consequently didn’t make their employers set aside more to fund pension promises made to them. He said, for example, that many auto workers and airline pilots are classified as blue collar in the bill, because they are covered by collective bargaining agreements, even though they are highly paid.

>Aides to Portman and Cardin told the Times that they were unaware that the measure had overlooked other mortality factors. A Cardin spokeswoman said the congressman’s goal was to help preserve the system of traditional pensions while a Portman spokesman said the bill was intended to make sure companies “aren’t forced to overpay” into their pension funds. “The pension system is a voluntary system, and if you force companies to artificially put more into their plan than is needed, that is a real disincentive,” the Portman spokesman told the Times.

Worker Mortality

>Until the early 1990s companies at that time were free to select any mortality rate when calculating their current pension obligations, and some were discovered to be using unusually high death rates, so as to shrink their pension debt.  In 1994, Congress required all companies with pension plans to use the same mortality table, or set of probability factors for death rates. However, the commonly used table at that time was 11 years old. So the Society of Actuaries, a professional group that engages in research and education, convened a committee to prepare a new table, based on current demographic trends, with Hustead as its chairman.

>The group decided to create a base mortality table, then test a number of factors to see what effect they might have on the death rates. One test looked at whether the color of one’s collar had any effect. The group defined blue collar as people who were represented by unions or who were paid by the hour — a definition that turns such unlikely workers as unionized athletes, airline pilots, aerospace engineers and even some newspaper reporters into blue-collar workers.  Separately, the committee tested to see whether pensioners’ incomes affected when they would die, according to the Times.

>After analyzing 11 million “life years,” the committee found that the color of the collar and the income level affected life span significantly. Blue-collar workers and the poorly paid both tended to die young. White-collar workers and the well paid tended to live longer.

Demographic Divides?

>Lynn Dudley, vice president and senior counsel of industry group the American Benefits Council, said the actuarial debate had apparently lost sight of the fact that the Portman-Cardin bill gives the Secretary of the Treasury broad power to determine the appropriate mortality factors. “Treasury is being given authority to make adjustments to these tables,” Dudley told .

>Dudley praised Portman and Cardin for their longstanding pension reform efforts – particularly for what she said was the lawmakers’ willingness to propose ideas they know will be controversial in order to spark productive policy debate. This was especially true when it came to the difficult areas of how to set pension funding levels for different kinds of companies including the still pending replacement for the 30-year Treasury in determining pension obligations, she said.

“I think it highlights how brave Portman and Cardin are to get out in front on a bipartisan basis and say ‘We need to look at this’,” Dudley said.

>Janice Gregory, a vice president for the ERISA Industry Committee (ERIC), said her group conceptually supported the notion of only requiring employers to fund pension plans to a level consistent with the demographics of their employees. However, the group hadn’t yet determined what alternative it was going to ultimately support, she said in an interview with .