Pension reforms recently proposed by the Bush Administration, while having good intentions, could force many sponsors of traditional pension plans to freeze or terminate their plans, according to a new analysis from the Employment Policy Foundation (EPF), a Washington, D.C.-based research group.

The decision to freeze or terminate the plans could come based on the higher costs employers would incur under the Administration's proposal, EPF says.

EPF's analysis found that the manufacturing industry, which is faced with the challenges of global competition, would be hardest hit by many of the proposed reforms. In particular, the proposal would tie pension-funding requirements to a yield curve that would require companies to calculate liabilities based on the age of their covered employees. This reform would hit manufacturing, transportation, and utilities companies hard since they have older workforces.

For workers ages 55 and older, the plan could cause reported pension liabilities to rise 3.5 percent, according to EPF, while reported pension liabilities for workers ages 50 to 54 could increase by 2.0 percent. Employers would need to ensure they have sufficient assets to fund these additional liabilities; otherwise, they would have to take funds from their general operating account to cover these additional expenses.

"Those increases may seem small," EPF President Ed Potter says, "but, for a large manufacturing firm the increases may mean the difference between making a profit and not. Furthermore, the lack of rate averaging in the proposal would make planning required contributions difficult for employers."

The administration's proposal would also significantly increase the cost of required pension insurance payments to the Pension Benefit Guarantee Corporation (PBGC), according to EPF's analysis. Under the proposal, payments under the fixed rate premium system would rise by 58 percent. EPF's found that this reform would also hit manufacturers particularly hard. Fully 49 percent of all premium increases would be paid by the manufacturing industry.

"The changes to fixed rate premium would add up to $178 million annually for manufacturers alone," Potter says. "These costs fall on a sector still trying to rebound from declining margins in areas such as computers, electronics and motor vehicles."

The administration's proposals for reforming pension insurance payments and funding requirements for defined benefit plans indicate that it is concerned about the long-term solvency of the system. However, the proposed reforms would greatly stress many firms who are already struggling to meet their pension obligations.

"Ultimately, Congress and the Administration must recognize that the current defined benefit system is voluntary. Reforms that greatly increase the burden on plan sponsors run the risk of causing many employers to stop offering those plans to their employees," Potter says.

Links

• Employment Policy Foundation
  • Full analysis (PDF)