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Congress Likely to Include Pension "Smoothing" in Highway Bill

Strategic Finance
September 2014

What is a corporate pension funding provision doing in a federal highway funding bill? Well, both the House and Senate are scraping for new revenue with which to replenish the Highway Trust Fund, which is on the precipice of bankruptcy. The House has passed its bill, and the Senate is close to doing so. The two bills have three pools of new federal revenue totaling $11 billion, one of which consists of "pension smoothing" revenue. This will effect only single-employer plans, which currently insure about 30 million Americans, still working and retired. Those plans have argued that the formula used by the Pension Benefit Guarantee Corporation (PBGC) to assess future corporate pension liabilities results in excessively and unrealistically underfunded results. That is because of the low interest rate environment. The two bills substitute, at least temporarily, a new formula that will lead to funding calculations which will be more realistic. That will mean companies will have to dedicate less money to funding future, potential liabilities, leading to smaller tax deductions, leading to greater federal revenue.  However, neither bill does anything to reform the PBGC premium structure, which assesses companies a flat rate per participant and a variable rate which applies only to companies with severely underfunded pensions. Plan sponsors have argued that instead of companies having to pay the same flat rate, the rate should be adjusted on a per-company basis based on the degree of solvency for the company. Companies with fully-funded pension plans resent having to essentially overpay premiums in order to cover the mistakes made by bankrupt companies, whose legacy pension costs they are forced, to some extent, to cover.

Author bio: 
Mr. Barlas, a freelance writer based in Washington, D.C., covers topics inside the Beltway.