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Impasse over highway bill holds up pension funding relief


WASHINGTON—A congressional impasse over a highway funding bill is endangering chances that employers will gain long-sought funding relief for their pension plans.

The prospects for funding relief brightened last month when the Senate, in a rare bipartisan vote, overwhelmingly approved a highway funding measure that included unrelated provisions that would allow employers to use higher interest rate assumptions in valuing their pension liabilities.

That would allow employers to slash their defined benefit plan contributions by billions of dollars over the next several years.

The pension interest rate provisions in S. 1813 were welcomed by pension lobbyists and others who have been working for months to convince lawmakers that the extraordinarily low interest rates employers now must use to value plan liabilities are forcing them to contribute more than is necessary, depriving them of cash they use in other areas of their business.

But employer hopes for quick congressional passage were dashed late last month when the House of Representatives refused to take up the highway bill. Instead, the House—whose concerns largely involve the broader measure, not the pension provisions—passed a 90-day extension of a current highway funding measure. The Senate then followed suit.

“Employers were energized after the Senate vote, but then the air quickly went out” after the House didn't take up the Senate bill, said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

Observers say the press of other issues means lawmakers may not again consider the bill until late June, when the 90-day extension nears an end.

The highway bill “is not expected to be brought up real fast,” said Lynn Dudley, senior vp of policy at the American Benefits Council in Washington.

“Nothing is imminent,” said Frank McArdle, a senior director at Aon Hewitt in Washington.

It also remains far from clear whether lawmakers will be able to reach agreement on the pending highway funding measure.

“There are some big challenges to the underlying bill. There will be no slam dunk on that one,” Mr. McArdle said.

But even if the highway bill stalls indefinitely, the pension interest rate provisions could be attached to other tax-related legislation that Congress would consider during its lame duck session that is likely to be held after the November elections.

The appeal of that approach is that the pension provisions, which would boost federal revenue by several billion dollars, would help to offset revenue losses from other provisions in a broader bill. That would be the case because employers' pension plan contributions are tax-deductible, so reducing pension contributions would increase employers' taxable income. The Joint Committee on Taxation estimates that the pension provisions would generate $9.25 billion in additional tax revenue through 2018.

“Anything that raises money has a decent shot” in winning congressional approval, said Geoff Manville, a principal with Mercer L.L.C. in Washington.


On the other hand, an emerging complication—in an “output” approach—could endanger chances of an agreement on the interest rate relief legislation. Under that approach that has been suggested by several House committee staffers and still is in the discussion stage, limits would be set on how much an employer's plan contributions could increase in a year.

Pension plan groups prefer that lawmakers accept the Senate version, which would change the interest rate methodology and ease employers' burden.

The Senate version “is a more straightforward way of addressing the contribution issue,” said Eric Keener, an Aon Hewitt partner in Norwalk, Conn.

Under the Senate bill, as under current law, employers would continue to value plan liabilities based on interest rates on top-rated corporate bonds for three different segments, averaged over 24 months. Segments refer to when benefits are paid to participants.

Under this methodology, interest rates that value plan liabilities are based on the maturity date of the corporate bonds. For example, interest rates on pension liabilities to be paid within the next five years would be based on corporate bonds maturing within five years.

The actual interest rate for each segment in 2012 would have to be within 10% of the average of those segment rates for the preceding 25-year period. In succeeding years, this 10% corridor would increase and top out at 30% in 2016.

If the methodology were in force today, the interest rate used to value benefits paid over the next five years would increase roughly three percentage points, with smaller, though still significant, percentage increases for benefits paid out beyond five years, experts say.

For example, the current required interest rate of nearly 2% to value benefit payments within the next five years would rise to just more than 5% under the Senate bill.

Benefit lobbyists say they hope that congressional wrangling on which approach to use is not likely to result in the pension provisions being dropped permanently.