Sunday, November 2, 2008

The coming crisis in pension funding

In a discussion last month with candidates for national office, I voiced a concern about the impact of the current economic crisis on pension plan funding. I spoke about the federal requirement that would make companies, including hospitals, pay significant amounts of cash to make up in one year the significant losses suffered by their defined pension pension plans in this year’s stock market.

The economic crisis is quite extraordinary. Stocks have tumbled 30% below their value last year at this time. It is unrealistic to expect companies to make up the shortfalls in their pension funds in a short amount of time.

Most pension plans have at least 50% of their funds invested in the stock market. On October 30 the Wall Street Journal reported that, of 361 defined benefit pension plans operated by companies on the Standard & Poors 500 list, stocks typically account for 50-70% of their investments. “Pension plan shortfalls,” the Journal reported, “will likely result next year in hits to earnings… and possibly [hits to] cash at a number of companies.” This could happen not only at the big, publicly traded corporations. It could happen at modest-sized, not-for-profit hospitals, as well.

The Pension Protection Action of 2006 (PPA) requires companies to achieve 94% of their target pension funding next year. The target level has been creeping up year-by-year and will reach 100% in a few years. Assuming the 30% decline in stock values continues through year-end, getting to the PPA’s target funding will require millions of dollars in cash from companies that are already strapped. This is the prospect unless there is a miracle stock market recovery equivalent in size to the disastrous performance seen since September.

I recently spoke about this looming problem to a member of the House Ways and Means Committee. I don't think he was being facetious when he told me Congress really shouldn’t pass laws about things it poorly understands, such as actuarial requirements and accounting rules. However, that is exactly what Congress does. It passes such laws, just as it did in 2006 when the PPA was enacted.

One candidate for office with whom I spoke speculated that a solution to pension underfunding might be to extend the pension plan coverage provided by the Pension Benefit Guarantee Corporation (PBGC). But that won’t work for a couple reasons.

First, the PBGC is itself under funded. In testimony last month before the House Committee on Education and Labor, Charles Millard, PBGC Director, acknowledged that “PBGC has been in a deficit position for most of its existence.” He said, "the single-employer program lacks the resources to fully satisfy its benefit obligations" See Mr. Millard's graph, below. As of 2007 the PBGC had an accumulated deficit of $14.1 billion.

Here's a second reason extending PBGC coverage won't work: to do so, the PBGC would have to increase its premiums to the companies whose plans are covered. That would mean additional out-of-pocket cash from the strapped companies.

The solution isn’t to prepare for more PBGC bailouts. The solution is to change the PPA rules for the extraordinary circumstance in which we find ourselves. Congress should make it possible for companies to adequately fund their pension plans over longer periods of time. Companies have to be able to meet their funding targets in a reasonable way – or they won’t meet them at all.

The American Benefits Council has started to talk about this, proposing last week to the Ways & Means Committee a ten-point plan to deal with “the [pension] funding requirements that were unanticipated just weeks ago.” The Council called upon Congress to enact changes that would avoid the huge cash calls that are now possible for organizations across the county as PPA requirements collide with the stock market's extraordinary losses.

With the national elections nearly behind us, dealing with the coming crisis in pension funding is an important (and apparently as yet unrecognized) responsibility of our elected leaders.

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