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Employers weigh new pension law

Federal legislation will boost contributions significantly, may spur more 401(k) plans

Friday, Aug. 25, 2006

Many Maryland companies are taking a wait-and-see attitude toward the sweeping new federal pension law, as analysts view the measure as having both positive and negative effects on businesses, employees and retirees.

‘‘It’s a very big piece of legislation, very complex,” said Angelique Rewers, a spokeswoman for Constellation Energy Group, the parent of utility Baltimore Gas & Electric Co. ‘‘We are still in the process of exploring how exactly it will impact us.”

The law, which runs more than 900 pages, was passed by Congress in early August. Some changes will take effect next year, but there will be a transition period, including two more years of pension funding relief.

The act requires employers that offer traditional defined-benefit pension plans — those funded primarily by employers that pay employees a monthly benefit upon retirement based on factors such as length of employment — to fully fund those plans within seven years.

Analysts view that provision as positive for people already in such plans — which are estimated to be underfunded by more than $300 billion — as it makes their retirements more secure.

The law also allows employers to automatically enroll employees into 401(k) accounts, which is expected to be a boon for investment companies that manage such accounts.

But that provision will likely result in more companies freezing or dropping their defined-benefit plans, said David Zion, a senior analyst with New York investment bank Credit Suisse.

‘‘We may be headed toward the accelerated demise of defined-benefit pension plans, continuing the transfer of risk from corporate America to the workforce,” Zion wrote in a recent report.

The number of defined-benefit plans in Maryland declined by 39 percent between 1996 and 2004 to 565, according to the Pension Benefit Guaranty Corp., a government agency that insures most private defined-benefit plans.

Lockheed would pay more

Companies in Standard and Poor’s 500 index would contribute some $47 billion to their pension plans if the new rules were in effect this year, Zion said. That is 57 percent more than the $30 billion they are actually expected to pay this year.

Some companies would pay more than others. Bethesda defense and information technology company Lockheed Martin Corp. would pay $1.2 billion to its traditional pension plan if the new law was effective this year, much higher than the $105 million expected, Zion reported.

Lockheed’s pension is healthy and is being funded to abide by all applicable guidelines, said Thomas Greer, a spokesman. The fund has a $25 billion trust.

The pension law contains a provision for aerospace and defense companies to be exempted from the new funding requirements for three years, while a committee reviews those requirements.

‘‘Companies in the aerospace and defense industry are in a unique position in that they cannot immediately adjust prices on their government contracts to adjust for increased pension liabilities detailed under the new law,” Greer said.

‘‘This is not an escape clause for aerospace and defense contractors, since the provisions of the legislation will be applicable to all companies in the industry in three years, but rather a more equitable transition approach for those companies that do a majority of their business with the Department of Defense,” he said.

Pension provisions Key provisions of the Pension Protection Act of 2006: Employers that offer traditional defined-benefit pension plans must fully fund their plans within seven years. Some rules restricting the use of pension plans to pay for retirees’ health care are eased. The higher contribution limit for individual retirement accounts, which reaches $5,000 in 2008, will be made permanent. Under the old law, the limit would have been reduced to $2,000 in 2010. Sources: Congressional Budget Office, Credit Suisse

Lockheed froze its defined-benefit plan in January to new employees while still allowing benefits to accrue for those already in the plan, citing competitive pressures and input on employees who want more control over how funds are invested. The company also added features, such as a new savings program.

Rockville defense contractors BAE Systems has a financially secure pension plan and will not be immediately affected by the new law, said John Measell, a spokesman.

BAE is reviewing the 401(k) automatic enrollment portion and has not made a decision on that, he said.

‘‘Congress did a commendable job balancing the needs of pension plan members and employers,” Measell said.

New Brunswick, N.J., medical products company Johnson and Johnson, which has some Maryland offices, would pay $659 million under the new rules, up from $37 million, Zion said.

But the estimates for Lockheed and Johnson and Johnson would likely decline if the companies have significant foreign pension plans, which are not covered under this new law, he said. Breakdowns between Lockheed’s and Johnson and Johnson domestic and foreign pension plans were not available.

Zion did not estimate what Constellation Energy would have to pay this year if the new rules were in effect, but the Baltimore company was listed among those with pension plans that were less than 80 percent funded. Others on that list included Walt Disney Co. and Motorola.

Some companies, including New York telecommunications giant Verizon Communications, which has numerous Maryland offices, would pay nothing this year under the new rules, Zion said. That compares with $245 million Verizon is actually expected to pay to its pension plan.

Helping 401(k) plans

The law will lead to the proliferation of defined-contribution plans, including 401(k)s, which already far outnumber traditional pensions, said James A. Klein, president of the American Benefits Council, a Washington, D.C., trade association that represents employers.

But the bill is still flawed due to the funding rules for defined-benefit plans, Klein said. ‘‘If well-funded pension plans leave the system because of unpredictable funding requirements, then the premium base will shrink and, long-term, the (Pension Benefit Guaranty Corp.) will be in worse shape,” he said.

The law will also help protect consumers from credit counseling agencies that prey on them by strengthening governing standards that such agencies abide by, according to the National Foundation for Credit Counseling, a Silver Spring nonprofit credit counseling organization.

The law includes some positive provisions for consumers, said Karen Ferguson, director of the Pension Rights Center, a Washington consumer organization. For instance, the act makes permanent a partial income tax credit for lower-income people who contribute to individual retirement and 401(k) accounts.

But the act does nothing to stop companies from freezing pensions or prevent businesses such as United Airlines from going bankrupt and canceling workers’ pensions, Ferguson said.

‘‘It will still lead to broken pension promises,” Ferguson said.