Pensions Strengthened by Congress

Congress took the unusual step of accomplishing something meaningful in the field of pension reform, and the effects could be felt broadly, whether or not you yourself are covered by a defined benefit plan. To simplify the action, the law enacted last week accomplished three important things:

1) It required a timeline for underfunded pensions to become fully funded. Nationwide, it is estimated that US Corporate pensions are only 85 percent funded, with the most profligate underachievers in the 55-60 percent funding range. The worst performers are clustered in the troubled auto and airlines businesses. United Airlines (NYSE: UAL) and US Air (NYSE:LCC) have already foisted their pension liabilities onto taxpayers because management could not find the discipline to either make reasonable promises to their employees or shore up their plans during good times.

2) It mitigated liability on the part of the employer when recommending or providing investment advisory services, especially for defined contribution (401k and 403b) plans. On the surface, you might think this means a whole lot more to people in my profession, but consider that a frightfully low percentage of potential participants participate in their plan, and even smaller percentage are actively managing those funds in a way that will be sufficient to meet their long term retirement needs.

3) The plan also enables employers to make compulsory deductions from employees' paychecks into the company-sponsored retirement plan. Although this may sound frightening from a personal property-rights standpoint, just consider that the default is being changed to participation, whereas before, the default was non-participation. This action may be the kind of "kick in the tail" that the public needs to start planning their financial futures.

Although making these much-needed changes provides a glimmer of hope, it is somewhat disheartening that Congress lacks the will to address three even more important aspects of the nation's retirement plans:

1) The Pension Benefit Guaranty Corporation (PBGC) which insures private pension obligations (think FDIC for pension benefits) operates in a way that only a government bureaucrat could love. Unlike traditional insurance, premiums for coverage bear absolutely no resemblance to the amount of risk that taxpayers assume. Clearly, firms such as General Motors (NYSE: GM), whose pension obligations promised to current and future retirees exceed shareholder equity by ten times, should be required to pay a higher premium per employee than other, more frugal companies. The PBGC's premium structure encourages employers to over-promise and under-deliver.

2) As awful as the current private pension underfunding seems, it is a mere shadow of the sickly pension plans for public employees nationwide. As is typical of institutions with no profit motive, public employees are being promised ever more generous retirement benefits. The politicians who accede to these unreasonable demands are clearly lacking leadership, instead opting to trade political favors now for IOU's to be paid long after they leave office.

3) All of this pales in comparison to the morass we face if Social Security funding is not put on a sustainable path. The Bush Administration learned a hard lesson about the so-called "third rail" of politics in 2005, paying a steep political price for floating some trial balloons. The fualt for this lies with both parties, and the consequences are that social security reform will most likely be left for future administrations. This is a shame, since the pain will be greater every year that action is deferred. Of course, this is a subject worthy of many posts.