Guest Article

(From the November 10, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Will Pension Funding Relief Be Part of New Economic Stimulus Package (If There is One)?

The 110th Congress may not be finished just yet. Lawmakers are considering returning to Washington for a post-election session dedicated to enacting another economic stimulus package. If that happens the bill could include some form of pension funding relief being advocated by trade groups such as the American Benefits Council, The ERISA Industry Committee, and the National Association of Manufacturers. But at this point it is far from certain pension funding relief will be part of any economic stimulus legislation, or whether Congress will take up any such legislation before next year.

What Pension Funding Relief Proposals Are In Play?

A joint letter these and other organizations sent to key Congressional leaders in late October outlines their proposals, which include the following:

Outlook

It is not clear how any of these proposals will be received on Capitol Hill. The argument in favor of pension funding relief, in a nutshell, is that falling asset values will force employers to make significant funding contributions to their pension plans next year. Those enhanced funding obligations unfortunately coincide with cash flow problems many companies are facing, which are being exacerbated by the ongoing credit crunch. Simply put, the less money companies have to put in their pension plans means more will be available for business investments that will help them keep and create jobs.

Powerful though this argument might be, there undoubtedly will be opposition to any proposals to provide relief from pension funding obligations. Congressional Budget Office estimates that workers have lost more than $2 trillion in retirement savings during the past 15 months likely will cause some lawmakers to wonder if this is the best time to give companies more flexibility with respect to their funding obligations. And the Bush Administration -- which would have to sign any bill that Congress might pass during this special session -- could resist any funding relief proposals on the grounds they might increase the Pension Benefit Guaranty Corporation's (PBGC) risk exposure. Those arguments could be bolstered by reports that the PBGC suffered $3 billion in losses on equity investments during the last fiscal year.

Still others might question whether relief is needed at this time. The effects of declining asset values have been partially offset by the recent dramatic rise in discount rates and corresponding drop in liabilities. This could change between now and January 1, 2009, the valuation date large calendar year plans must use for funding purposes. Some might favor waiting until then to get a better picture of the funding problem and determine what, if any, relief is needed.

Another issue is that of perception. Some in Congress have complained earlier stimulus and bailout bills have focused too much on relief for companies, and not enough on immediate job creation. Those individuals might not necessarily view pension funding relief for companies as a top priority for this bill.

One final noteworthy consideration has nothing to do with job creation, asset and liability values, or even retirement security. The federal budget deficit for the just-ended 2008 fiscal year was $454.8 billion, up from just $161.5 billion in 2007. Clearly, the total cost of any new stimulus package will be a significant issue. Because pension funding relief would reduce the amount companies are contributing to their plans -- and thus reduce the deductions they take for funding contributions -- it could be scored as a revenue raiser, and thus a valuable offset for other spending items.

Of course, as noted it is possible the 110th Congress will decide to defer action on any economic stimulus legislation until next year, after the 111th Congress convenes. Given the pace of recent events, the landscape could be very different at that time.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.