Pensive on Pension Reform

The congressional pension-reform drama may not end with a January conference committee to reconcile bills passed by the U.S. House and Senate. The White House has signaled it wants funding reforms phased in faster, with no breaks for troubled industries or companies, such as the provisions for struggling airlines in the House bill.

Even if President Bush signs the final bill, House Democrats may try to bring pension reform back to the table. So far, reform has focused on funding employers' pensions and the Pension Benefit Guaranty Corp., the government institution that insures defined benefit pensions. Democratic congressmen George Miller of California and Edward Markey of Massachusetts want to also investigate pension management.

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On Nov. 30, Miller and Markey requested a Government Accountability Office investigation into the impact of management fees on pension solvency. Edward Siedle, president of Benchmark Financial Services, attorney and longtime activist on this issue, says the PBGC is not required to conduct any forensic audit of failed pensions when assuming control, which reduces the odds of recovering losses from third-party financial managers when a pension fails. It also helps cover up any underlying pension financial mismanagement, which Siedle claims is rampant in the industry.

A pension reform bill passed the House by 294-132 on Dec. 15. The House deal came together at the 11th hour, following a flurry of activity including modifications to satisfy the United Auto Workers' concerns about early retirement, plant closures and pension freezing. It sets the stage for a conference committee to reconcile the House and Senate bills in January or February. The Senate passed its reform measure in November.

Any resulting legislation will represent a tough balancing act. The nation's employer-based defined benefit pension plans, which are underfunded by an estimated $450 billion, need repair. The PBGC is running a deficit of nearly $23 billion, and will struggle to turn that around in the face of major new bankruptcies, like the filing by auto-parts manufacturer Delphi.

But if the cure is too expensive, more employers will freeze defined benefit plans and shift into defined contribution plans, deny pensions to new employees, or file for bankruptcy to escape pension liabilities. Striking the right balance in the new law--to stabilize defined benefit pensions without driving too many more employers out of the system--is everything.

For many corporations, the long-term solution is already to exit defined benefit plans. Many corporations place new employees into defined contribution plans like a 401(k). These plans guarantee only that employers will contribute a defined sum into the accounts. That solution doesn't work for baby-boom employees already in defined benefit plans that guarantee a monthly retirement income. It's much more difficult, financially and legally, to shift them into defined contribution plans. To save their pensions, legislation must raise funding standards for employers and shore up the PBGC.

The final shape of the bill and its impact are still uncertain. More pension failures and public anger could give Democrats the political leverage during an election year to bring reform to center stage in 2006.

January 1, 2006

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