Senate Passes Pension Funding Bill
>Under the terms of the bill, the current 30-year Treasury bond rate used to determine pension liabilities will be replaced with a short-term, two-year stop gap rate based on a blend of investment-grade corporate bonds. The US Pension Benefit Guaranty Corporation (PBGC) estimates the legislation could save $80 billion over the next two years, according to a news release by the office of the bill’s sponsor Senator Judd Gregg (R – New Hampshire).
>Despite warnings of a veto from President Bush, the Senate approved a version of the bill that grants roughly $16 billion in breaks to companies via a reduction in deficit rate contributions (DRC). Under the DRC provisions, airline and steel companies, those hit hardest by the recent pension underfunding storm, could waive 80% of those payments the first year and 60% the second year.
>The three Cabinet secretaries who comprise the PBGC board, Elaine Chao of Labor, John Snow of Treasury and Donald Evans of Commerce, said they would advise President Bush to veto the bill if it should contain this provision because they said it would worsen pension plan underfunding, now estimated at $350 billion nationwide (See PBGC Calls Out DRC Modifications ).
>In its most recent caution, the PBGC, which reported earlier this month a deficit of $11.2 billion, pointed to a weakened defined benefit system across the nation and fears that accelerating pension contributions would only worsen the PBGC’s situation. In addition to a deficit that is three times larger than any previously reported shortfall, the PBGC is also exposed to $85 billion is plans sponsored by “financially weak employers” (See PBGC Says Pension Promises Outpace Funding ).
>The DRC issues will be worked out sooner rather than later. The US House of Representatives version of the bill was passed without amending the DRC provisions (See House Approves Pension Relief Bill ) . With the Senate’s passage of the bill today, the two versions will now proceed to a joint House-Senate committee to be reconciled.
Time is of the essence though and Congress must move before April, when companies will again have to determine payments based on the 30-year Treasury bond rate. Because the Treasury Department no longer issues the bond, its interest rate has fallen precipitously. That in turn, under an inverse relationship, causes required pension contributions to increase.
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