>"Companies say that if nothing is done they will be forced to >pour cash into their pensions next year."
How tragic, that way they'd be forced to create longer term growth strategies instead of focusing on short term quarterly earnings announcements. Or say, contribute to employee pension plans instead of executive compensation. >"Companies would prefer as a solution a single rate based on corporate >bonds. Such a rate would typically be higher than one based on Treasuries, >easing their liabilities." Of course they would. Then, they could discount pension liabilities, at not just a higher rate than Treasuries, but one that is arbitrarily based on some ill-defined corporate interest rate for which there'd be tons of room to tinker. Corporate yield curves are less liquid than Treasuries and thus offer more opportunities to manipulate their values. Plus, from a balance sheet perspective, it would mean every company could effectively set their own individual pension calculation, with no common bar across corporate America, creating less transparency in a system that's been proven so sorely lacking in transparency to begin with. This measure and all prior versions of it, as I mentioned here a couple months ago, would allow corporations to rig pensions such that the worse the corporation performs, the less it would have to pay out in pension liabilities. In the process, workers would get screwed twice, once due to instability in their current jobs and salaries resulting from poor corporate performance, and the second time due to decreased pension payouts in the future. Nomi -----Original Message----- From: PEN-L list [mailto:[EMAIL PROTECTED] On Behalf Of Eubulides Sent: Monday, September 15, 2003 1:03 AM To: [EMAIL PROTECTED] Subject: [PEN-L] pensions legislation Bill Would Modify Pension Plan Rules By Albert B. Crenshaw Washington Post Staff Writer Monday, September 15, 2003; Page A06 Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) plans to sponsor legislation that would require operators of pension plans to take into account the age of their workforce when computing pension liabilities. The proposal, which Grassley aides said could be marked up by the committee on Wednesday, is strongly opposed by companies that sponsor pension plans, though they agree that present law needs to be revised. Grassley said through an aide that his proposal has "a solid core of bipartisan support" in the committee and is important because "workers need reliable funding of their pensions and employers need a reliable basis on which to calculate pension payments." The underlying issue involves funding of traditional pensions, called defined-benefit plans, which are insured by the federal government through the Pension Benefit Guaranty Corp. Many are underfunded under current market conditions, and the PBGC has expressed concern that a savings-and-loan-like crisis could emerge if nothing is done. The liabilities of a pension fund are computed by adding up its promised future benefits and discounting that sum back to the present using an interest rate as a discount factor. The lower the interest rate, the higher the present value of the liabilities and the more likely a plan will appear underfunded. Current law requires plan operators to base these calculations on the rate of the 30-year Treasury bond. But the long bond has been discontinued, and demand for those remaining in circulation has driven down their yield -- the current rate of return for a purchaser. Combined with the stock market's poor performance, the result as been a large number of badly underfunded plans. Congress temporarily eased the rules last year, but that expires at the end of December. Companies say that if nothing is done they will be forced to pour cash into their pensions next year. Companies would prefer as a solution a single rate based on corporate bonds. Such a rate would typically be higher than one based on Treasuries, easing their liabilities. Grassley plans to propose that, but only for three years. After that a corporate-based, interest rate "yield curve" would be phased in. The senator's plan, somewhat similar to one suggested recently by the Treasury Department, calls for pension operators to use a variable formula in calculating the present value of the benefits they have promised workers when they retire. This value -- the plan's liabilities -- is matched against its assets in determining whether the plan is adequately funded. The yield curve would mean using different interest rates to figure liabilities of workers of different ages, on the grounds that benefits promised to older workers must be paid sooner than those promised to younger workers and that timing difference should be taken into account. Janice M. Gregory of the ERISA Industry Committee, a group of large employers, called Grassley's idea "undeveloped, untested and unknown." "It's not something that will calm troubled waters," she said. As Gregory put it: "You can't simply take out the 30-year [bond] and plunk in a yield curve. The [funding] rules are all integrated with each other. When you change something as critical as the discount rate you have to change everything else. So when I say people are going to be thrown into a bit of chaos here, that's what I'm talking about."
