The battle over pension surpluses
Roger ThompsonThe Battle Over Pension Surpluses
A proposal to restrict employers' access to surplus pension-plan funds has triggered a legislative battle in Congress, and there is no letup in sight.
Bills have been introduced in both the House and the Senate to restrict so-called pension reversions, in which employers terminate overfunded pension plans and recover the excess cash. But opposition from business groups and the Bush administration has derailed the push for quick legislative action.
Supporters of new restrictions on reversions maintain that contributions to pension plans represent deferred wages and belong to plan participants. Business groups point out that pension law traditionally has given employers the right to recover surplus pension funds, which can be used for investing in plants and equipment, for enhancing competitiveness, or for creating jobs.
Even so, asset reversions are viewed by many lawmakers as having adverse effects on retirement security.
The architects of the proposed crackdown on reversions are Sen. Howard Metzenbaum, D-Ohio, and Rep. William Clay, D-Mo. Each introduced the same measure--the Employee Pension Protection Act of 1989. They had hoped for legislative action before May 1, when a six-month Treasury Department moratorium on reversions expired. During the moratorium, the Treasury stopped issuing "determination letters," which outline a company's liabilities before a pension plan is scrapped.
Metzenbaum engineered the moratorium last fall to give Congress a chance to act before more reversions took place. As the moratorium deadline drew near, however, Metzenbaum failed to persuade Treasury Secretary Nicholas F. Brady to declare an extension.
The legislation introduced by Metzenbaum and Clay would require companies involved in reversions to set up new pension plans with generous benefit cushions. Employers who failed to do so would lose control of the surplus funds. Depending on the form of the replacement pension plan, the employer would be required to provide a 125-percent or 135-percent cushion against projected liabilities. The employer also would have to provide a cost-of-living increase to retirees. If there is no replacement plan, all assets would be allocated to employees and retirees.
Metzenbaum and Clay intend to press for their legislation even though the number of reversions has dropped sharply in recent years. Since 1980, 1,897 defined-benefit pension plans, each with more than $1 million in surplus assets, have been terminated, according to the Pension Benefit Guaranty Corp., the federal agency that insures private pensions. After paying off the 2.1 million workers and retirees under the plans, the companies recovered $19.9 billion in surplus assets. Reversions peaked in 1985 at 582, producing $6.1 billion in excess funds for the plans' sponsors. Last year, there were 166 reversions, which produced nearly $1.8 billion in surplus funds.
At issue in the current debate is who owns the excess money--labor or management?
A coalition of labor, retiree, and pension-rights groups maintains that the money set aside in pension plans for workers represents deferred wages and should not be diverted to any other purpose. "These deferred wages are trade-offs for a promise of a pension that is expected to continue and grow in value and provide adequate retirement income for long-service employees," says Bert Seidman, the AFL-CIO's director of occupational safety, health, and social security.
Says Metzenbaum: "Corporate managers have been raiding employees' retirement benefits to line their own pockets."
Business groups, including the U.S. Chamber of Commerce, argue that the measure introduced by Metzenbaum and Clay would erode the voluntary nature of the pension system and would discourage creation of new defined-benefits plans. They also note that Congress has recognized an employer's right to claim excess pension-fund assets since the Revenue Act of 1938. That right was incorporated in the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that currently governs private pension plans.
Under the law, an employer may not gain access to surplus pension funds unless the plan is terminated. The surplus is defined as the amount left over after the employer meets all obligations to plan participants--current workers and retirees--either through the purchase of individual annuities or through individual lump-sum payments.
"Metzenbaum and Clay have masterfully manipulated this issue to project the view that employers are raiding the employee-pension cookie jar, rather than taking a surplus that they put in there in the first place," says James A. Klein, deputy executive director of the Association of Private Pension and Welfare Plans (APPWP), a Washington, D.C.-based trade association.
Imposing strict limits on reversions also would discourage employers from properly funding pension plans, says John Erlenborn, a former House member who is regarded as the "father" of ERISA and is now a law partner with the Washington firm of Seyfarth, Shaw, Fairweather & Geraldson. "The law requires defined-benefit-plan sponsors to dig deeper into their own pockets if plan assets are insufficient to pay promised benefits," says Erlenborn. If employers must bear the risks, why shouldn't they reap the rewards of an overfunded plan, he asks.
"It is important to keep the reversion activity in perspective," says David M. Walker, assistant secretary of labor for pension and welfare benefits. "Most sponsors do not want to terminate their `overfunded' plans. It should be noted that only a small minority of all plan sponsors have engaged in such activities. And of those that have, most have established new defined-benefit plans providing their employees with the same or better benefits as the terminated plans."
Moreover, a 1986 Department of Labor study of 97 pension-plan terminations and reversions showed no loss of benefits to participants at termination, regardless of the type of successor pension plan. By retirement, 84 percent of the employees covered by a follow-on defined-benefit plan continued to show no loss in benefits; half of those covered by a follow-on defined-contribution plan showed no loss; but everyone who received no follow-on pension plan received lower benefits.
Defined-benefit plans obligate the employer to pay a retiree an amount defined by a formula that takes into account years of service and salary levels. Defined-contribution plans build lump sums in each participant's individual account; employers as well as employees may contribute.
Pension reversions did not become an issue until the early 1980s, when a confluence of events caused terminations to mushroom. The bull market on Wall Street pushed fund values well beyond the sums needed to meet projected liabilities. And high interest rates greatly reduced the purchase prices of annuities for companies that terminated plans.
An unprecedented number of mergers and acquisitions also fueled reversion activity. In some cases, corporate raiders terminated overfunded pension plans and used the surpluses to reduce debt. In others, management terminated plans to use the surpluses to fend off unwanted mergers or acquisitions.
"The real motive for most reversions is not to get hold of the surplus money," says Klein, of the APPWP. "That comes about tangentially as a result of a business transaction, such as selling a business and merging existing plans. Once you deduct those reversions that are done for normal business reasons, there are very few left that are done to gain access to surplus funds."
Against the background of the arguments over reversion, the Labor Department has urged Congress to defer any decisions until the effects of recent changes can be analyzed. Those changes include an excise tax--originally 10 percent and now 15 percent--that the Tax Reform Act of 1986 imposed on surplus assets derived from reversions. The Pension Protection Act of 1987 also imposed a number of new requirements on overfunded and underfunded pension plans.
Regardless of whether Congress agrees to defer action, business will continue to fight retrictive legislation.
"The Metzenbaum/Clay legislation threatens the American pension system," says Lisa Sprague, manager of pension and employee benefits for the U.S. Chamber of Commerce. "Building inflation and mandated benefits into the system distorts the benefit-negotiation process and discourages employer participation.
"Despite the bill's intention to make pension plans more secure, the effect would be contrary to the goals of a healthy private pension system."
COPYRIGHT 1989 U.S. Chamber of Commerce
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