Tuesday, February 01, 2005

Pension Reform - Financial Chemotherapy

President Bush's pension reform proposal may threaten pension plans, warns a report from the Employment Policy Foundation, a research group inWashington, D.C. Increased liabilities, premiums and administrative burdens associated with the President's proposal "could ultimately force many DB plan sponsors to freeze or terminate their DB plans," the report asserts. A key provision of the proposal would require employers to discount future pension liabilities using a Treasury Yield curve. A short-term interest rate would be used for workers near retirement and a long-term rate for younger workers. Consequently, says the EPF study, employers "could experience a 3.5% increase in reported pension liabilities for workers ages 55 and older and a 2% increase for workers ages 50 to 54." Firms in the manufacturing, transportation, utilities and communications sectors would be hit hardest, researchers suggest."Another problem arises when the interest rates are not averaged over a specified period of time," the report adds. "Under the proposal without a weighted average, pension liabilities will be much more volatile from year to year."The proportion of large employers providing traditional pensions dropped from 83% in 1990 to 45% in 2003, Hewitt Associates reports. While the reformation details remain rather sketchy, it is far from clear whether reform, intended to preserve the system, might actual eliminate it.

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