U.S. House Finishes Session with Flurry of Labor Legislation—Will Senate Follow Suit?

The core provisions of the more sweeping pension bill are designed to close the gap between pension liabilities and pension fund assets. This bill would affect 30,000 U.S. companies that provide pension benefits to roughly 44 million employees. Currently, employer-sponsored pension plans are estimated at near 90% funded. This bill would close the $450 billion gap (as estimated by PBGC) that remains. Firms would have seven years to fully fund their pension plans. The bill would also make it more difficult for firms to shirk pension fund obligations, imposing them on the PBGC. In the event that a pension fund was terminated, and the liability transferred to PBGC, companies would still be required to pay $1,250 per participant. The United Auto Workers Union supports the bill—despite “red zone” language that allows multi-employer plans, when critically under-funded, to slash benefits already earned by their employees. This bill passed the house on a 279-131 vote.

The Senate version of the pension bill would give airlines special breaks, including more time to pay down unfunded liabilities. Carriers that agree to freeze pension benefits and close plans to new entrants would be given 17 years to fund their current plans. They would also be allowed to use a lower interest rate to calculate what is owed. This portion of the bill is designed to protect the PBGC from greater financial obligations, but it currently favors carriers Delta and Northwest. As of December, Northwest had a $3.7 billion funding shortfall, while Delta faced a $6.4 billion gap; pension benefits for both plans have been frozen. American and Continental, barring a change, would face a less favorable provision in which they would have only 10 years to fully fund their plans, and be required to use a higher interest rate in calculations. But they could avoid this by freezing their pension benefits, as Delta and Northwest have. Continental’s pilots have agreed to allow that carrier to freeze pension benefits. However, American’s parent corporation, AMR, would have to negotiate with the airline’s unions in order to move forward with freezing pension benefits.

Greater mandatory contributions to pension funds could have a considerable impact on the employment cost index (ECI), as measured by the Bureau of Labor Statistics (BLS). The BLS, in its National Compensation Survey (NCS), collects data on the cost to employers of having employees, with pension contributions included in the benefits portion of the index. Because the NCS focuses on the cost to employers, rather than the benefit to employees, such pension fund contributions are recorded. Pension fund contributions, however, tend to be more volatile than the pension expenses recorded when an employee receives a pension benefit payment. Much of these fluctuations are dependent on market performance. When markets are performing well, large pension contributions are not necessary. However, when the markets dip, pension funds quickly gain an asset-liability gap. Large, lump-sum pension contributions tend to dwarf regular benefits payments—which generally include paid leave, insurance, legally required benefits, and supplemental pay. Pension contribution payments have been shown to increase the ECI for benefits in a given industry by as much as 36% quarter-to-quarter, as was seen in aircraft manufacturing in the first quarter of 2005. Required funding could create additional volatility for this index in other industries as well. Should the current pension legislation pass, volatility in various ECI series would most likely increase substantially over the next seven years.