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The pension crunch, and what to do

Rocky Mountain News

Published November 23, 2008 at 12:05 a.m.

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The financial meltdown has roiled public pension plans, as we noted last week, including the Colorado Public Employees' Retirement Association - which is why state lawmakers should be prepared to take new measures enhancing PERA's solvency.

But private pensions are in trouble, too, with The New York Times estimating these funds have lost $250 billion or more in value since the start of the year. And while private pensions also need shoring up, they face far more onerous regulations than their public counterparts.

One funding requirement, enacted in a 2006 pension reform law, will force employers starting next year to pump huge sums into their pension plans, even if satisfying that mandate means they must lay off workers or temporarily suspend operations until financial markets recover. The lame-duck Congress may consider legislation relaxing that requirement, and it's essential for the measure to pass.

The 2006 mandate requires private companies to immediately inject cash into their pensions when their funding levels fall below a threshold. Businesses must bring their pensions to 100 percent funding within seven years, starting with 92 percent funding at the end of 2008, 94 percent in 2009, and so on.

And here's the kicker: Pensions that fall below their funding standards at the end of a calendar year must be 100 percent funded immediately and permanently.

Nearly 300 businesses, unions and trade associations recently asked Congress to suspend that regulation temporarily, for good reason. Without a reprieve, in the next few months dozens of companies, including some of the nation's largest, may have trouble both making those cash payments and meeting payroll. Even those not in such a bind will take a serious hit to the bottom line.

The law was enacted in reaction to the high-tech meltdown, when major companies went bankrupt and pension plans that invested heavily in tech stocks collapsed.

Some flexibility for pension funding is needed, a safety valve to protect employers during deep financial downturns. Pensions aren't tanking because of poor management or unsound investment decisions. The entire economy is contracting, and diversified portfolios of every variety have taken a beating.

A bipartisan bill introduced Wednesday in the Senate Finance Committee would, among other things, delay the date pensions have to be 100 percent funded by three years.

It would also relieve companies that fall below their mandated funding target of the requirement to immediately fund their pensions 100 percent.

There's also a benefit for workers who've received lump-sum payments when their employers' pensions went bankrupt. They can roll those payments into Roth Individual Retirement Accounts and build new nest eggs without getting clipped by the tax man.

Lest you suspect hypocrisy on our part, favoring private over public employers, let's be clear: Even the slightly relaxed rules for private pensions would be far more rigorous than anything faced by public pensions such as PERA - and would make those private pensions solvent far sooner than PERA is likely to be. (And yes, the E.W. Scripps Co., owner of the Rocky, would be affected by any change in the pension laws.)

Some 20 million private-sector workers rely on pensions from their employers as at least part of their retirement income. Congress should make sure companies can keep their promise to employees without jeopardizing the financial stability of otherwise viable enterprises.

Comments

  • November 23, 2008

    6:43 a.m.

    Suggest removal

    Elwood writes:

    I would agree with this reduction in retirement plan funding requirements if the funds were made whole BEFORE any payouts to stockholders could be made.

  • November 23, 2008

    7:05 a.m.

    Suggest removal

    Mike_In_Hartsel writes:

    Why is there any shortfall at all? Instead of guarantees of a stated amount in the future, why not a stated amount paid into a fund from which the person retiring gets their share as an annuity for whatever the market will grant them at the time of retirement? Then the fund is always 100% funded.

    We have to stop dreaming about a secure future in which our life is guaranteed by the government or some private pension and start saving to protect ourselves with private pensions as a back-up. The government is inept and unions are corrupt. What's left?

  • November 23, 2008

    6:24 p.m.

    Suggest removal

    mks68 writes:

    Mike you see it worked like this , first off annuities are a horrible investment, in the early part of the decade when we had the dot com bubble many pensions who were diversified as they should betook huge losses and there were shortages that brought this 2006 law about. In an effort to make good on the solvency issue pension plan administrators decided to invest in a DEFINED benefit that was insured ... this is called a traunch, ahhh yes the fine Subprime loan mess...you see Fannie and Freedie told banks to make the loans to undeserving people and the Government would guarentee the loan, the banks needed to get rid of the investments so they wrapped the mortgages into 1000 lot investments that guarenteed a Defined payment, they insured them through places like AIG, and sold them to organizations like PERA, and other pension plans. Then we had the Energy crisis, remember when the Democrats went on summer vacation while the republicans protested about no energy plan by working? yes that was when we had 4 dollar a gallon gas.
    well people couldnt pay the bills and many defaulted on thier bills.
    This forced AIG and others to pay he insured amount guarenteed in the underwritting agreements to make the Tranches AAA rating, and banks became broke and untrusting of making investments in these Defined Benefits.
    Now you are seeing the real after math, pensions and other people are taking a hit , yes the tax payer is paying the bill for a poloticians wet dream , while 401's are half value the public employee is just fine..
    and that is how liberalism works

  • November 24, 2008

    8:07 a.m.

    Suggest removal

    mmannino writes:

    Defined benefit plans like PERA are an illusion. Politicians goaded by public employee groups and the idea of a free lunch, over promised benefits. The ability to pay the benefits depended on a rate of return of 8.5%. It is obvious now that the rate of return will be far short of the target level.

    The benefit levels in PERA must be adjusted. PERA members should not blame PERA management or taxpayers (or even George Bush). A reasonable compromise is a reduction in benefits in exchange for less impact on employment levels and current compensation. Subsidies for early retirement should be eliminated to reform PERA.

  • November 25, 2008

    5:15 a.m.

    Suggest removal

    mrfxx writes:

    Elwood writes: "I would agree with this reduction in retirement plan funding requirements if the funds were made whole BEFORE any payouts to stockholders could be made."

    Don't forget that while pensions are underfunded, NO MEMBER OF MANAGEMENT should be given a "platinum parachute" - nor any form of a bonus.

    By the way, part of that "underfunding" was because, prior to the law change, it was perfectly legal to underfund pension plans, Then when companies got in trouble (like UAL), those defined benefits plans were dumped on the PBGC, which lowered pension plan payouts to about 1/3 of what the retirees (who often had taken pay cuts so the companies could fund the pension plans) were owed. Meanwhile, upper management got payouts that would allow not only those members of management, but their children and grandchildren to live in comfort without ever having to work a(nother) day in their lives. What's wrong with that picture?