Pension tension
Workers can no longer count on company-funded retirements
Alarmed, Congress began allowing companies to save cash by contributing things like stock or timberland to their pension funds. Congress also let firms count "credits" from previous years' excess contributions, even if those contributions evaporated in the bear market. Pension managers were also given leeway to invest in a broadly diverse portfolio. But they could (and most did) put more than two thirds of their funds in equities, including many of the 1990s' flimsiest dot coms. By comparison, insurance companies that sell annuities must put the vast majority of their investments in safe, low-paying bonds. What's more, Congress let executives use accounting rules to report earnings on invested pension funds as profits and to smooth out estimated gains and losses over a five-year period.
On paper. Gains from the market run-up of the '90s meant firms had to put little or, often, no extra cash in the fund to keep up with rising liabilities, while estimating big future investment gains in their annual reports. Of course, executives who reported better profits typically got big bonuses and fat, guaranteed pensions. And a recent Harvard Business School study of more than 1,000 firms found that companies with poor independent oversight and executives about to exercise their stock options tended to use higher estimates of future pension fund returns than did other companies. A Federal Reserve study also found that investors were so dazzled by the pension-inflated earnings reported by many companies in 2001 that they overpaid for stocks by about 5 percent that year. In fact, pension accounting has now drawn the scrutiny of the Securities and Exchange Commission. Last fall, it asked for records from six major companies as part of a general look at the way pensions affect profits and stock prices.
When the stock market bubble burst, the total value of the pension funds of S&P 500 firms fell from nearly $1.2 trillion in 2000 to $955 billion in 2002, according to an analysis by Credit Suisse First Boston. But what really launched today's crisis was the skyrocketing cost of pensions. Widespread plant closures forced millions of workers into premature retirement, boosting pension payouts, while falling interest rates raised the cost of the bonds that firms needed to buy to cover future pension outlays.
Now, employers and union pension funds are presenting a surprisingly united front, telling Congress that if they are just given a little more time and flexibility--and a little help from the taxpayer--the rebounding stock market, slowly rising interest rates, and a growing economy will finally reverse the pension free fall. "I don't think you should underestimate the potential that asset values may come back and mitigate some of the problem," says James Klein, president of the American Benefits Council, the chief lobbyist for companies that offer pensions.
Companies and unions are backing Bush's plan to allow cash contributions to pensions even when the funds appear fully funded (the current ban aimed to prevent companies from overshielding profits from taxes), so that they can squirrel away money during good times. But both question the plan to raise annual PBGC insurance premiums for financially healthy employers by 60 percent to $30 per worker, and those of employers with troubled pension funds by even more. "We think that the financial hit would lead to an exodus of employers from the pension system," says Alan Reuther, director of legislative affairs for the United Auto Workers.
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