WASHINGTON — WASHINGTON -- Final passage of the new world trade agreement brings more than lower tariffs and trade barriers. It also forces companies with underfunded pension programs to put more money into the plans.
The Retirement Protection Act, attached almost unnoticed to the enabling bill for the General Agreement on Tariffs and Trade, known as GATT, will apply to companies whose pension plans are less than 90 percent funded.
The new law also will give more power to the Pension Benefit Guaranty Corp., a federal corporation that insures corporate defined-benefit pension funds for about a third of the work force. Defined-benefit plans promise a specific amount of money to employees upon retirement.
Under the law, companies with underfunded pensions, which now cover almost 8 million workers and retirees, not only must make larger contributions to their pension funds, but also must do so more rapidly than in the past.
They also will have to pay higher premiums to the PBGC, which faces a deficit of $2.9 billion. With the new law, the PBGC expects that deficit to disappear within 10 years.
Companies with underfunded plans also will be required to provide the PBGC and plan participants with more information on the funding status and the limits of the PBGC's guarantees.
xTC The PBGC said that over a 15-year period, the funding of large underfunded pensions will improve from the current average of about 60 percent of vested benefits to more than 85 percent.
Under the old rules, funds used a wide range of actuarial assumptions, and these, combined with credits and other offsets, have let companies minimize or avoid contributions.
Between 1989 and 1991, for example, contributions to 40 percent of the plans with the largest underfunding didn't even cover the interest on their unfunded liabilities.
In 1992, the top 50 underfunded defined-benefit plans had theoretical liabilities of $38 billion, meaning they would have had to pay out $38 billion they didn't have in their
funds to cover employees if the businesses stopped operations then. That compares with such liabilities of $27 billion in 1987.
The auto industry makes up 57 percent of the total underfunding of the PBGC's Top 50 companies. Steel firms account for another 21 percent.
The new law requires companies to use a standard mortality table, called the 1983 Group Annuity Mortality Table, which most insurance companies use to calculate the necessary reserves for annuities. This table uses lower mortality rates than tables used by most other firms.
General Motors, for example, figures that 32 out of every 1,000 male auto workers will die at age 65. The group annuity table assumes a mortality rate of about 16 per 1,000.
The new law also demands that funds use a less-flexible method of calculating their pension liabilities, a complicated formula tied to long-term interest rates.
Mike Johnston, an actuary with benefits consultant Hewitt Associates, says the actuarial changes won't increase contributions or liabilities for most funds.
"We estimate that for 90 percent of plans, the rule doesn't have a lot of meaning," he said.