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Now that President Bush has signed pension reform legislation into law, the clock is ticking for Congress to come up with a more permanent solution. Congress crafted the law, which Bush signed Saturday as only a two-year fix. And it’s likely to spur only more debate, not less. One key issue, for example, will be whether the corporate bond rate that’s part of the two-year solution, or some other one, should be part of a longer-term pension reform effort. “There is growing interest and the need for more fundamental reform of pension system,” said Bruce Josten, executive vice president of the U.S. Chamber of Commerce. “We’re still going to have some funding challenges going forward. This is not a holiday from making contributions.” Under the two-year fix, the 30-year Treasury bond interest rate formerly used to make pension-funding calculations will be replaced with a corporate bond rate — a change that will enable companies to contribute $80 billion less to their pension plans. Several steel and airline companies, for example, will contribute $1.6 billion less to their pension plans under a special addendum to the law over the next two years. The bill allows those industries to pay in the first year of the moratorium only 20 percent of the catch-up payments, or “deficit reduction contributions,” that become mandatory when company pension coffers fall below 90 percent of their required funding. The companies would pay 40 percent of the DRC payments in the second year. “They’ve been suffering from a combination of forces, including Sept. 11, the unusual high price of fuel and the Iraq hostilities,” said Gary Ford, an attorney at Groom Law Group, an employee benefits specialty law firm in Washington. “Absent pension-funding relief, many of them would have been faced with punitive pension-funding obligations at exactly the wrong time.” Indeed, the financial shape of the companies in those two industries in the next two years remains to be seen, given how bankruptcy has ravaged both. Will they recover enough to not need the two-year crutch, or will more permanent pension reform have to include something longer term for them? “There’s a whole range of things that the [Bush] administration is working on,” according to Kent Mason, an attorney at Davis & Harman in Washington. “We believe one component of broader funding reform is to make the interest rate fix permanent. But the administration may have different perspective.” More specifically, he said, the administration may resurrect the idea of using a yield curve to calculate pension liabilities instead of staying with the corporate bond rate. Under the yield-curve scenario, a different discount rate would be used for every year in the future, instead of a fixed single rate, said Mark G. Beilke, director of employee benefits research at Milliman USA, an actuarial consulting firm. Opponents of this measure claim the concept is untested and could result in companies moving pension plans out of the stock market. But supporters contend a fixed rate typically undervalues liabilities due in the near term while overvaluing liabilities due later. Meanwhile, crafting a more permanent fix would give the Pension Benefit Guaranty Corp., a quasi-federal agency that insures corporate pension plans, more of an opportunity to push its case. The PBGC supported switching to a corporate bond rate for the next two years but firmly opposed the relief for the airline and steel industries. At issue for the agency is that it went from a surplus to an $11 billion deficit in only a couple of years, primarily due to the large numbers of bankruptcies in those two industries. “The best insurance for the PBGC is to help the economy,” said Davis & Harman’s Mason. “If companies succeed, their plans will succeed.” With the law in effect, presumably the pension plans won’t fail, said Milliman’s Beilke. “Without this [temporary] legislation, it was likely the plans would fail immediately. “Now the plans get a little more time to recover,” he said. “That is definitely a good thing.” Copyright �2004 TDD, LLC. All rights reserved.

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