WASHINGTON – For years, pension funds have been among the more sacrosanct of the sacred cows grazing on Capitol Hill. Along with Social Security, the funds have been protected from major regulatory changes because they are the financial foundation of most Americans’ retirement. But in the 104th Congress, several sacred cows, including pension funds, are being herded toward change in the name of regulatory reform.
A House GOP proposal, part of a tax bill before Congress, would allow companies with 125 percent of the assets needed to cover pension liabilities to withdraw funds above that mark. It would do away with prohibitive penalties that limit the way corporate managers can use that extra cash.
House Democrats say that withdrawing pension funds threatens financial security. Excess pension funds, in a 1990 law authored by former Sen. Lloyd Bentsen of Texas, are protected from high-risk investments that could suddenly decline sharply.
But supporters say Democrats are overreacting. Business managers, they say, could use the cash for needed capital without jeopardizing their employees’ future.
“I don’t believe this permits a raid on pension funds,” said Rep. Bill Archer, R-Houston, chairman of the House Ways and Means Committee. “I think on balance this will mean more job creation, more pension plan formation, . . . which I believe we should encourage.”
The plan’s provisions would allow companies to withdraw from overfunded pension plans, without tax penalty, in the first six months of 1996. Later withdrawals would bring a 6.5 percent penalty, which the GOP says would generate $10.5 billion in tax revenue each year.
The Bentsen law hits companies hard for dipping into pension plans for any reason other than health care for retirees. Companies are subject to a 50 percent penalty on the withdrawn amount and must pay an additional 35 percent in income taxes.
Fort Worth business leader John Justin said he believes that Archer and the GOP are on the right track.
Justin is chairman of Justin Industries, which owns Acme Brick Co., and the popular Justin, Tony Lama and Nocona brand boots.
He said Justin’s pension fund has been near the 200 percent mark and that he could think of a better use for the money than the conservative, trust-fund-type investments required by federal law.
“I think what most companies would do is put it against debt,” Justin said. “We would take that money and pay down debt. After that, we would put it into our plant operations and make improvements that would help our business.
“I don’t think you’ll see many companies take that additional money and spend it frivolously. Not if you’re running a business. You can’t afford that.”
Bentsen wrote his pension-protection law after a 1980s wave of corporate takeovers financed, in part, with money from pension funds. Some plans became seriously underfunded.
Critics predict crisis
PENSION FUNDS are among the nation’s largest investment groups and represent the largest single source of savings and capital. Fund managers, who are monitored by the government, make calculated assumptions on how much money they will need to pay pensioners.
Most plans will pay a retiree between 1 percent and 2 percent of his or her final annual income for each year of service. The federal government guarantees pension payments up to $30,800 a year through the Pension Benefit Guaranty Corp. A spokesman for the corporation said 85 percent of Americans will get less than that annual amount in retirement.
But Rep. Sam Gibbons of Florida, the senior Democrat on the Ways and Means Committee, said the proposal could cost the government billions if it ends up covering a wave of bankrupt pension plans.
“As soon as these pension funds go belly up and we’ve started another S&L-type crisis around here, I’m going to arise, wherever I am, dead or alive, and say, `I told you so,’ ” he said.
Horace Deets, executive director of the American Association of Retired Persons, said allowing companies to invest excess pension funds would increase risks for employees counting on the funds for retirement and would erode the nation’s savings.
Fear of underfunding
MARTIN SLATE, executive director of the Pension Benefit Guaranty Corp., said that if Congress approves the provision, it could prompt corporations to take an estimated $40 billion from pension plans.
“It is open season on pensions,” Slate said. “Pension underfunding could grow, placing retirees and the federal insurance program at risk. We have seen all too often that today’s overfunded pension plans can become tomorrow’s underfunded pension plans.”
But Rep. William Thomas, a California Republican on the Ways and Means Committee, said it does not make sense to ask companies to “sit on” funds that could be better spent elsewhere at no risk to workers.
Critics, he said, want to “make sure that you’ve got 160 percent of the money sitting there doing nothing. That is a recipe for disaster. Other countries don’t do that.”
The Pension Benefit Guaranty Corp. supplied the Ways and Means Committee last week with data showing that even pension plans that met the 125 percent funded standard could fall below 100 percent if the stock market suffers a 10 percent correction or interest rates decline just 2 percent.
But pension funds dipping below the 100 percent level is not uncommon in corporate America. According to the latest data available from the Pension Benefit Guaranty Corp., several major corporations have underfunded pension funds, including Textron Inc., the parent of Bell Helicopter, which has 80 percent of its pension plan funded.
General Motors, which operates an assembly plant in Arlington, has 76 percent of its plan funded. And LTV Corp., which moved to Cleveland just after the sale of its Dallas electronics and defense subsidiary three years ago, funds just 47 percent.
The figures come from a report the Pension Benefit Guaranty Corp. issued at the end of 1994 naming the 50 “most underfunded” pension funds.
“It concerns me,” said Rep. Pete Geren, a Fort Worth Democrat, who cited the current bull market. “If there would be a correction or any kind of bear market . . . what might look like excess pension benefits today may be funds that aren’t there tomorrow.”
Author: Michael D. Towle; Star-Telegram Writer – Washington Bureau
Copyright 1995 STAR-TELEGRAM INC.