Leadership That Counts (Even if Nobody Knows)

Yesterday the Bush administration took a big step towards securing the financial future of many, if not most Americans, and very few people really noticed. Bush came out with strong support of.....Corporate pension reform.

I know, I know, not the big long term financial reform for the elderly most of you were thinking about.

I know, I know most of you don't think about big long term financial reform for the elderly (really for all of us) very often, if at all. But trust me, this is a big deal and Bush is really getting this one right ( I know, I like Bush, big surprise right?)

For those of you who don't think about corporate pensions let me give you a quick and dirty primer for why this is important. Pensions are like 401(k) plans run by companies for their employees, ideally the company decides what income they will guarantee for their employees in retirement, then chooses an appropriate asset allocation, runs the numbers to see how much they need to save each year, and takes that money out of their employees' paychecks and saves it for them. They monitor their pension every year and if it has more money than it needs in order to pay the promised benefits it is "over funded" if the plan doesn't have enough money it is "under funded."

Companies that are still in business and plan to stay in business for at least one more year are called "going concerns" (this covers most companies) so their pension calculations assume that they will continue to save money in their pension every year, for the rest of time. As long as the pension gets these payments each and every year, they can meet its obligations to pay benefits.

Unfortunately some companies go out of business or encounter serious problems that prevent them from contributing to their pension plans. This is where the trouble starts. Since the companies have been counting on payments that continue for eternity, when the payments stop, the pension quickly finds that it does not have enough money to pay benefits.

To make up for this there is a US government agency called the Pension Benefit guarantee corporation (PBGC). The PBGC pays benefits to workers whose pensions fail. For this service the PBGC requires all companies with a pension to pay a small premium for the insurance they provide to workers. Unfortunately, due to some big time pension failures (think about virtually every steel company in the US) the PBGC already runs a $2 billion plus deficit each year, and guess who gets to pick up that tab, if you guesses the American taxpayer, you guessed correctly.

During good times pension funds earn above average returns, resulting in the fund being "over funded" (think of your 401 (k) in 1999). Some enterprising executive somewhere decided that this money could be counted as extra earnings and because of that the company wouldn't have to contribute as much to the pension that year. Earnings go up, Execs. Make more money and everything looks good.

Unfortunately sometimes things go bad (think of your 401(k) since early 2001), then all of a sudden the pension is "under funded" (since we quit funding it when things were soooo good). So what to do? Well you could put extra money in to make up the difference, but that would lower earnings for the year, so nobody wants to do that. Some enterprising exec. To the rescue, deciding that the solution is to assume that the money we already have will just grow faster (even though it really won't), so they almost have enough money already, so they don't need to put in any more. Problem kind of solved, but the rest of us kind of screwed.

It is "creative accounting" at its best, and it is a danger to retirees and to taxpayers. Fortunately President Bush has decided to tackle the issue. Although not many people will ever realize it, this could be a bold move, and it could really make a difference. This is the reason it is good to have a second term. Bush is willing to take on this issue even though it will make a lot of people unhappy in the corporate world. It requires that companies must more fully meet the promises they have made to workers. It will lower earnings for some of the worst offenders.

Wise investors should seriously consider selling the stock of companies that are negatively affected if these new rules go into effect. If management will play games with employee pensions to earn a bigger bonus, I guarantee they will play other games that could eventually endanger the value and viability of the company the investors (owners) have entrusted to them.

In the long run this is good for everyone, and just another example of the kind of leadership I am glad we have in the White House.

Timothy Burger