A temporary replacement for the 30-year Treasury bond in pension calculations is set to expire at year’s end. Lack of a deal will mean that companies will effectively to use a rate 15% lower than under current law when calculating the extent of their pension liabilities, according to a Dow Jones report. The last day of the US House is Monday; the Senate’s final 2003 work session is slated for Tuesday.
The House this year has passed two versions of pension-funding legislation, but a unified US Senate plan has yet to emerge. Senate staff were unable to hammer out a deal on a plan last week before lawmakers left town for the Thanksgiving holiday.
Ironically, holding up a potential pension funding deal is not the actual replacement for the 30-year Treasury bond, but rather a temporary pension-funding reprieve for which airlines have been battling.
In short, the embattled airline industry would like a three-year reprieve from accelerated pension funding contributions. The pension funds of most of the major air carriers are substantially underfunded. They include UAL Corp., parent of United Airlines, American Airlines’ parent AMR Corp., Delta Air Lines Inc, and Northwest Airlines Corp. Continental Airlines Inc.’s pension fund is in substantially better shape, but it has joined the others in lobbying for the pension-funding break.
Without Congressional action, they will be required to make additional payments to get their pensions out of the red within the next five years. The accelerated payments are called pension deficit reduction contributions (DRC).
The airlines argue they cannot make the DRC payments and maintain the cash flow necessary to remain in business. Wall Street analysts and one lobbyist working the issue say a DRC holiday would save the major air carriers an average of about $600 million in pension contributions in 2004. The airlines also say that when the stock market and interest rates recover, their pension funding picture will look substantially less bleak.
However, the federal private pension insurer, the Pension Benefit Guaranty Corp. (PBGC) has been staunchly opposed to the DRC holiday. The PBGC and others in the Bush administration say that the proposed funding holidays will allow these pensions to plummet even deeper in debt, leaving the PBGC more exposed should the plans eventually fail. The PBGC takes over private pension plans when companies go into bankruptcy or are otherwise unable to fulfill their obligations.
Key senators now hope that the House will pass a third version of the bill allowing businesses to use an index of long-term corporate bond rates in pension calculations. The senators would also like the third version to cut the airline businesses’ DRC payments 80% in 2004 and 60% in 2005.
The Senate wants the House to act first as a simple matter of logistics – the House can pass the bill when it returns Monday and the Senate could then pass it when it comes in for its last day Tuesday. But senators also think the House’s action might spur reluctant senators to allow the measure to pass. Efforts to move any bill in the Senate have been stymied so far, but those in the Senate feel that if the House presents a final, middle-of-the-road, take-it-or-leave-it plan, critics might drop their objections.
The Senate is also still pushing a proposal that would also give multi-employer pension plans funding relief. But in exchange for funding relief, the multi-employer plans would have to provide better information about their financial solvency to the government and plan participants.