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^ ^ e ~ in er etter FORECASTS FOR MANAGEMENT DECISIONMAKING 1729 H St. NW, Washington, DC 20006-3938 • KiplingerForecasts.com • Vol. 82, No. 21 Dear Client: Is a broad pension collapse coming? No. At least, nothing like the 1980s' S&L crisis, which wound up costing taxpayers $125 billion. Many pension plans ARE under stress, underfunded by $450 billion. The ailing airline and auto sectors, with 3 million plan members, account for $80 billion. Companies whose bonds are rated junk account for $96 billion in all. ® A handful of Plans will doubtless fail. But most won't. Rising stock markets and interest rates will boost fund returns, eliminating much of the underfunding problem. Even if all at-risk plans defaulted... The Qovernment insurer could handle it, although thousands of individuals would see their Washington, May 27, 2005 Housing Lending, commissions Travel Airlines, automobiles Politics Congressional moderates Selling Internet ads, cable TV Defe€lse Space weapons Trade Central America, U.S.-EU regs Health Geriatricians, Medicare The Economy Growth rates benefits trimmed. Congress will shore up the Pension Benefit Guaranty Corporation to ensure the agency has the resources to absorb failed pension plans. Annual fees charged employers will go up, from $19 per worker to $30. Surcharges on badly underfunded plans will also be increased. And expect tighter rules for firms that fall behind on payments. They'll have to put in more, sooner, and inform workers of problems. Lawmakers will also forbid firms from promising better pension benefits to employees in lieu of immediate annual increases in wages and benefits. In return...more predictability for employers, helping them to anticipate funding needs. Instead of setting formulas each year or two, Congress will back a permanent plan based on average corporate bond rates. Also on tap: Tax benefits for making extra contributions in good years to build surpluses as a hedge against market volatility. That won't stop the retreat from defined-benefit plans, however. Over 80,000 businesses, mostly small, have already dropped such plans. Only 30,000 companies still offer them, but most are large firms... including 75% of the Fortune 500. As a result, the number of participants, counting retirees, has continued to increase over the past decade. Most employers that still have plans won't abandon them entirely. But many will take steps to end growth and limit their liability: They'll freeze benefits for current employees to curb costs. Offer new hires only 401(k) plans with company contributions. Or convert to cash-balance plans, particularly after Congress or the courts resolve some legal questions. Court rulings so far have differed on whether conversions discriminate against older workers. But companies like the plans because employer contributions are fixed. And many workers, especially younger ones, find the portability appealing. Tne Kiphnger Lener (ISSN i 628~7t301 is published weekly for $g4/one year, g 154,mvo years, $2221three years $ubSCIIphOC illquiriBS: 800544-0155 or subservices~a kiplingercom by The Kiphnger Washington Etlrtors, 1729 N SL.. NW, Washington. DC 20006.3938. EdifOri21 i/If01m2fi0/1: Tel 202-B87~6462; Far, 202J78.8976; Periodicals postage paid a; Washington, DG. POSTMASTER Sentl address changes to The Kiphnger Lener, P 0. Bor 3295, Harlan. IA 6'~ 593. Email, letters@kiplmgercom; or Web site, KiplingerForecasls ccm