[Laborgreens] Fwd: Treasury Plan Could Slash Pension Payouts

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Date: Sat, 12 Jul 2003 18:43:44 -0400
Subject: Treasury Plan Could Slash Pension Payouts
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USA Today
July 9, 2003

Treasury plan could slash pension payouts 

Christine Dugas USA TODAY

Workers could receive significantly smaller lump sum
pension payments under a Treasury Department (news - web
sites) proposal unveiled this week. The proposal also
includes relief for underfunded corporate pension plans,
which have been battered by bear market losses and low
interest rates.

Companies have pressed hard for funding relief. But
worker advocates say they shouldn't get pension help at
the expense of retiree benefits. ''We think this is a
big deal,'' says David Certner, AARP's director of
federal affairs. ''They're proposing to slash worker
benefits in order to give employers funding relief.''

Congress must approve the Treasury plan. It is expected
to be added to a pension bill in the House that is
sponsored by Reps. Rob Portman, R-Ohio, and Benjamin
Cardin, D-Md.

The Treasury Department has so far released only broad
outlines of its proposal, which could be altered in the
legislative process. On July 15, the House Education &
the Workforce Subcommittee will hold a hearing on the
proposal.

Here are answers to basic questions about the proposal
and why it is important to you:

Why is the government proposing these changes?

A key reason is that by law some pension calculations
must be based on the 30-year Treasury bond, which is no
longer issued. Though interest rates are generally low,
the rate currently used for the 30-year Treasury bond is
lower than corporate bond rates. And low interest rates
cause estimates of future pension liabilities to soar.

Many companies have asked Congress for relief. Facing
huge pension contributions, some are considering
freezing benefits or getting rid of their plans.

In addition, many experts say that the obsolete Treasury
rate has artificially boosted lump sums, because the
lower the rate used in a calculation, the higher the
future benefit. That provides an incentive for workers
to choose them over an annuity, which provides a
lifetime stream of income.

Who would be affected?

The proposal would affect workers in traditional
pensions that allow them to receive their benefits in
lump sums. But it would not affect those who choose to
annuitize their pension benefits.

It is not yet clear how the change would affect cash
balance pension plans, which are more portable and
accumulate evenly over time. Regulators are expected to
issue guidance on those plans in the future.

How would the proposal affect lump sum payments?

If approved, the proposal would not change lump sum
calculations in the first two years. Then during the
next three years, a new formula gradually would be
phased in that would be based on a corporate bond yield
curve matching the age and tenure of the workers in a
plan.

Though few details are available, the change would
generally result in lower lump sum payments, experts
say. ''A 45-year-old worker is likely to see a 25%
reduction in their lump sum payment,'' Certner says.

The new corporate bond rate formula would be
particularly unfair to certain workers who are forced to
take a lump sum when they leave a job, says Norman
Stein, University of Alabama law professor and pension
expert. Other workers can choose to annuitize benefits.

Would all companies benefit?

In the first two years, companies would get to calculate
pension liabilities using a corporate bond rate that is
proposed in the Portman-Cardin bill. That rate is about
1.5 percentage points higher than the rate now used,
experts say. It would give immediate relief to
underfunded pensions.

For example, under current law, the Fortune 1,000
companies with traditional pension plans will contribute
an estimated $160 billion in the next two years,
according to a study by consulting firm Watson Wyatt. If
the Treasury proposal were approved, those companies
could save as much as $100 billion in pension
contributions, the study found.

What happens after the first two years?

During the next three years, a corporate bond yield
curve -- based on a corporate bond rate composite that
would vary according to the demographics of a workforce
-- gradually would be phased in for the purposes of
calculating pension liabilities. Because that rate would
be tailored to the workforce, old-line manufacturers
with older workers and many retirees would end up with
higher pension funding liabilities. ''It's a dilemma,''
Stein says. ''Many companies that can least afford it
would be hardest hit.''

Some companies are concerned that the corporate bond
yield curve would be complex and less predictable than
the current system. Other experts urge Congress to avoid
temporary fixes and provide comprehensive reform so that
companies don't bail out of pension plans.

''There is a real concern that the proposal will
destabilize the pension system,'' says Shaun O'Brien at
the AFL-CIO.

http://story.news.yahoo.com/news?tmpl=story&u=/usatoday/20030709/bs_usatoday/5307599

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