Some companies hold back US pension contributions

[HenryTo]

Not too bullish from a liquidity point of view, in my opinion:
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Some companies hold back US pension contributions
Tue Apr 26, 2005 05:24 PM ET
By John Crawley

WASHINGTON, April 26 (Reuters) - Some companies have withheld or are considering holding back contributions to employee retirement plans this year to take advantage of a funding law that would disappear if Bush administration pension reform proposals are adopted by Congress.

Corporate pension experts also said on Tuesday during and after a Senate hearing that U.S. businesses are worried that reforming rules for traditional pensions at retirement could drive up costs to the point that industries, especially old-line manufacturing, would have little cash left over to grow their operations.

"We believe that the administration's pension funding scheme will do far more harm than good," said Sallie Ballantine Bailey, a senior vice president of steel bearing manufacturer Timken Co. Bailey represented U.S. business interests at a hearing of the Health, Education and Labor subcommittee on retirement and aging.

While lawmakers focused on changing law to stabilize the deficit-ridden federal pension insurance program run by the Pension Benefit Guaranty Corp., business interests teamed with organized labor in an unusual alliance to try and thwart key aspects of the administration's reform proposal.

The administration has proposed significant changes in how pension plans are funded, wishing to tighten rules to ensure that companies fully fund what they promise.

Plan failures in the steel industry in the 1990s and more recently the airline industry have driven up the amount of U.S. pension underfunding to $450 billion, government figures show. Underfunding is the difference between the assets of a pension plan and promised benefits.

Some companies, like General Motors (GM.N: Quote, Profile, Research) , have responded to underfunding by replenishing pension accounts. But GM is fighting the Bush plan because of proposed requirements, including one for companies to pay $11 more per participant to $30 in premiums to insure their pension plans with the PBGC.

"The premium increase being discussed is hundreds of millions of dollars in costs to GM," said company spokesman Chris Preuss. "That is money that comes right out of building the business."

Preuss said GM supports flexible remedies, including the concept of putting more into plans when times are good and less when things are more difficult. GM lost $1.1 billion in the first quarter of 2005.

While GM funded its liability last year, some companies -- not all with pension deficits -- have chosen not to fund their pensions or are considering withholding contributions this year, said Ron Gebhardtsbauer, a senior fellow with the American Academy of Actuaries.

"Underfunded amounts don't get better. They could get a little worse," Gebhardtsbauer said.

Current law allows businesses to take funding holidays -- called credit balances -- based on the level of accumulated annual contributions, and Gebhardtsbauer said there is anecdotal evidence that businesses are beginning to use them.

Randy Clerihue, a spokesman for the PBGC, said the agency has experienced the bad side of credit balances and wants them eliminated. Bethlehem Steel used them before moving to dump its pensions onto the government as did bankrupt carriers US Airways (UAIRQ.OB: Quote, Profile, Research) and most recently United Airlines (UALAQ.OB: Quote, Profile, Research) .

The government does not know until a company reports its year-end pension statement whether it has skipped annual funding payments.