Compared to current law, the Portman-Cardin proposal would reduce pension liabilities in 2004 for both pension plans, while the Treasury proposal would reduce pension liabilities for the pension plan with younger participants and increase liabilities for the plan with older participants. For purposes of comparison, the two-year delay in implementation that is included in the Treasury plans was discounted in the analysis.
The study examines the influence of the competing proposals-one from the Treasury Department and the other contained in the Portman-Cardin Pension Bill (H.R. 1776)-on the pension plans of two hypothetical companies. To determine the effect of the Bush Administration''s yield curve proposal, the two plans were calculated based on varying ages of pension participants, one mature (MatureCo) and one young (YoungCo). EPF applied an estimated yield curve for Moody''s Aaa rated corporate bonds based on July 22, 2003, prices to estimate the comparative effects of the Treasury proposal on the hypothetical MatureCo and YoungCo pension funds.
Present Liabilities
Under existing law, each pension plan is required to calculate the present value of its expected future pension payments based on the weighted average of 30-year U.S. Treasury bond interest rates over the past 4 years. The study found that with current interest rates, the present value of future pension liability of MatureCo at the beginning of 2003 would be approximately $608.4 million. For YoungCo, the liability was estimated at $429.5 million, reflecting the assumption that pension payments would be relatively lower in near-term years and higher in out-lying years.
Future Liabilities under Current Law
For calculation of the present value of pension fund liabilities at the beginning of 2004, EPF estimated the weighted average interest rate under current law as 5.39 percent-a decline of 0.2 percentage points from the previous year. Using this interest rate, EPF calculated MatureCo''s 2004 liability would increase by $17.4 million to $625.8 million. For YoungCo, the decline in interest rate would raise the present value of its pension liability from $429.5 million in 2003 to $447.1 million in 2004.
Future Liabilities under the Portman-Cardin Proposal
Under the Portman-Cardin proposal, EPF''s analysis found the applicable interest rate used for pension liability calculation would be 6.37 percent. Using this interest rate, the present value of pension liabilities for the hypothetical MatureCo would be $549.6 million and $371.3 million for YoungCo, in 2004.
Future Liabilities under the Administration Proposal
Under the Treasury plan, MatureCo would see the present value of its pension liability rise to $626.5 million for 2004-an increase of $17.4 million compared to the 2003 present value calculated under present law. Under the Treasury proposal, YoungCo''s liability present value would be $409.1 million for 2004, a reduction of $38.0 million compared to the amount for 2004 if present law continued in force.
Pensions Plan Contributions
The significant differences between the Portman-Cardin proposal, the Treasury plan and current law have large impacts on the need for future pension contribution. Currently, companies are required to maintain assets of at least 90 percent of future plan liabilities to be considered "fully funded." Using current law, both companies would need to contribute funds to their pension plans in 2004 to meet this requirement. MatureCo would be required to contribute additional funding of $15.7 million and YoungCo would be required to contribute an additional $15.8 million. Under the Portman-Cardin proposal, neither company would be required to contribute additional funding to be considered fully funded. In 2004, YoungCo would also be considered fully funded under the Treasury department proposal, while MatureCo would be required to contribute $16.3 million to meet the 90 percent requirement.
The study is available online at: http://www.epf.org/research/newsletters/2003/pb20030730.pdf.