The good news is that in late June Congress passed, and the president signed into law, the Pension Relief Act, a measure designed to cut some slack for companies that have found themselves facing significantly increased underfunding in their traditional defined-benefit pension plans. The bad news is that the relief act doesn't solve the problem--it only delays it, and many companies will have to think long and hard about whether it makes more sense to seek relief or take the pain now.
The problem is clear. The market crash in 2008 and early 2009 hit pension plans hard, as did the fall in interest rates, leaving many sponsors of DB plans with big holes to fill. To some extent, the recent market rebound has helped; the total pension underfunding of S&P 500 companies fell from $308 billion at the start of 2009 to $261 billion at the beginning of 2010. But $261 billion is still a lot of red ink.
The Pension Relief Act gives companies the option of delaying the annual payment they're required to make to fill that hole. Under the so-called 2+7 plan, companies that opted for a seven-year schedule for eliminating their pension liability can elect to defer that repayment for two years, which need not be consecutive. Companies with calendar-year plans can choose either 2010, 2011 or, retroactively, 2009, and pay only interest in two of those years under the terms of the act.
But there are some limitations that companies need to consider. For one thing, mindful of public anger over high pay for executives, Congress put a limit on "excess compensation," saying that if a company pays any employee more than $1 million in taxable compensation, it cannot elect to defer its pension payment. Extraordinary dividends and share redemptions are also disallowed in any year that a company elects to defer paying into its pension fund.
Jeffrey Litwin, senior vice president and actuary at Sibson Consulting, says the decision on whether or not to defer paying down a pension liability under the act will be "very company-specific." Noting that many companies these days, including those with pension liabilities, are cash rich, Litwin says, "It could be advantageous to use your cash to pay down the liability, especially if you can use the tax deduction." On the other hand, he notes, if there is no tax advantage, it might be better to take a year's relief.
But Standard & Poor's analyst Jonathan Nus warns that deferring dealing with a pension liability could backfire. "The legislation anticipates that markets will heal themselves, and that companies will be in a better position to deal with their liabilities later, and there is no certainty that that will happen," Nus warns. "If the markets don't improve, and discount rates don't rise, you could be just kicking the can down the road."