PBGC in trouble

Looking to Keep Pension Agency Solvent, Congress Fears Backlash

Michael Schroeder. Wall Street Journal. (Eastern edition). New York, N.Y.: May 12, 2005. pg. A.1

Abstract (Document Summary)

Such defaults, along with the bursting of the stock-market bubble five years ago, have exacerbated financial strains for the agency. Meanwhile, pensions' funding shortfall across the U.S. economy is much larger. Taken together, the defined-benefit pension plans that the PBGC guarantees are underfunded by a total of $450 billion, the agency estimates. Airlines have a shortfall in their pension plans totaling more than $31 billion, the agency says. (Of course, these liabilities could drop significantly as interest rates rise and the investments in the PBGC's funds enjoy the same strong returns that have boosted private pension assets during the past two years.)

The vast majority of plans taken over by the PBGC have been from companies that have been liquidated. In those cases, the PBGC asks the bankruptcy courts to agree to turn over the pension plans to the agency. In other cases, companies on their own can use bankruptcy proceedings to convince the judge that they can't survive without shedding their pension liabilities. The PBGC must accept the court's rulings. Also, the PBGC can initiate a pension-plan takeover by going to court and asking for the termination of company plans.

Congress is preparing to consider legislation that's expected to mirror many White House proposals that would improve the PBGC's financial standing and pressure companies to make their plans more secure. Taking the lead is Rep. John Boehner, an Ohio Republican who is chairman of the Committee on Education and the Workforce. In a statement yesterday, Mr. Boehner said that the United Airlines situation "highlights the uncertainty many employees and employers face in today's defined-benefit pension system." He's working on a bill, expected to be introduced in the next few weeks, that's expected to include many of the administration's proposals.

Full Text (1531 words)

While UAL Corp. was getting approval this week to dump United Airlines' pension woes on the federal government, Congress was working to make that a harder act to follow for other companies with underfunded pension plans. In dealing with the growing problem, though, legislators face a tough balancing act.

Congress has been drafting legislation that would strengthen the finances of the beleaguered Pension Benefit Guaranty Corp., the federal agency that insures private-employer defined-benefit pension plans. It's the PBGC that would be responsible for $6.6 billion of United's unfunded pensions.

Last year, the PBGC had $62.3 billion in long-term obligations to pay workers' pensions, but only $39 billion in assets taken over from failed employer plans. The $23.3 billion shortfall was double the previous year's gap.

The legislation being drafted likely would make thousands of companies with defined-benefit pension programs -- that is, plans that provide workers with a set amount each month, based on wages and number of years on the job -- pay much higher premiums to the PBGC. Chances are the changes would affect companies with shakier plans, as well as those with healthier ones.

But while the legislation could shore up the PBGC's finances, lawmakers must avoid steps that could give companies another reason to abandon defined-benefit plans by making it even more costly to keep them afloat.

The upshot is that the government's pension safety net faces not only severe strains, but also significant changes in how it works.

Congress is acting because the prospect of more bankrupt pension plans would plunge the PBGC, which already has billions of dollars more in commitments than it can cover, even more deeply into the red -- and raise questions about whether a taxpayer bailout will be needed down the road. Employer groups warn that companies will be tempted to freeze or end their plans if they're compelled to pay higher premiums.

More than two-thirds of large companies, typically those in unionized industries, offer defined-benefit pension plans. According to the PBGC, defined-benefit plans cover 20% of private-sector workers at companies of all sizes -- down from 40% two decades ago.

On Tuesday, a Chicago bankruptcy court cleared the way for the largest pension default in U.S. corporate history by approving United Airlines' proposal to turn four underfunded employee pension plans and their costs of $6.6 billion over to the PBGC.

By far, the industry accounting for the biggest portion of underfunding is auto makers and automotive-parts companies. The plans of those companies are $45 billion to $50 billion shy of promises made to workers.

Delphi Corp., the No. 1 U.S. auto supplier, is struggling with declining sales at its top customer and former parent, General Motors Corp., plus big pension obligations and higher raw-materials costs. Delphi has an unfunded pension liability of $4.3 billion and $9.6 billion in retiree health-care liabilities, according to its fourth- quarter earnings statement.

The PBGC was created by Congress in 1974 after some high-profile auto-industry bankruptcies -- including Studebaker-Packard Corp. -- left retirees without pensions. Its mission is to guarantee, up to a point, defined-pension plans. (It's currently the trustee of 3,500 plans with about one million participants.)

If a pension plan shuts down without enough money to meet its obligations, the PBGC guarantees up to $45,614 annually for employees who retire at age 65. Often, companies replace those plans with a new defined-contribution program, such as a 401(k).

Most of the PBGC's money comes from investment returns on corporate assets assumed from companies that turn over their pension liabilities to the government. The agency also collects premiums -- totaling on average $1 billion annually -- from employers whose plans it guarantees. So far, the PBGC hasn't gotten any taxpayer money, and has only a relatively small line of credit from the U.S. Treasury of $100 million.

Besides the airline and automotive companies, the PBGC is keeping a close watch on the retail sector, with its financially strapped department stores and underfunded pensions. Companies in the wholesale and retail sector had a $4.3 billion funding shortfall in 2003, the PBGC said.

Some industries with significant pension underfunding, including utilities and aerospace and defense companies, aren't considered at high risk to offload their pension obligations. Defense contractors, for example, include pension expenses in their government contracts. Utilities typically raise customer rates to pay employee benefits.

Companies with the most well-funded plans are those in the computer, real-estate, biotechnology and financial-services sectors.

At the other end of the spectrum are the airline and steel industries. So far, the agency has taken over the pension plans of 141 steel companies, with underfunding totaling $10.2 billion, and 12 airlines, with underfunding of $11.6. billion -- including the United Airlines plans. In both industries, a few bankruptcies have had a domino effect, triggering similar bankruptcy filings by rivals seeking to cut costs to be competitive.

That is less likely to occur in the auto-parts business, where a half-dozen companies with a total funding deficit of less than $1 billion are trying to terminate their plans in bankruptcy court. Most parts makers aren't unionized, so a bankruptcy filing wouldn't pressure rivals to do the same to lower labor costs.

Some analysts warn that a bailout of the PBGC funded by taxpayers could be on the horizon. Without major changes, such as higher premiums, and assuming $2.7 billion in new unfunded pension plans each year, the agency will run out of cash and rack up a $78 billion deficit in 16 years, according to a new analysis by the Center on Federal Financial Institutions, a Washington think tank.

Two ideas being pushed by the White House -- and considered by Mr. Boehner -- are stirring concern among employers. One would boost premiums paid by companies to the PBGC to $30 a year from $19 for each employee covered by a pension plan. The premium proposal also would increase so-called variable premiums pegged to the level of a companies' underfunding. Another administration proposal would create a new formula for measuring assets and liabilities.

James Klein, president of the American Benefits Council, a trade group for large employers, said that businesses are worried that the new formula for measuring pension-plan health would cause nearly all plans to be considered less than 100% funded. In that case, most companies that offer defined-benefit pensions would have to pay both the higher flat rate and an additional variable premium.

The result would be that healthy companies would see their total premiums increase 240% under the proposal, more than double the increase for weaker companies, according to an analysis by Watson Wyatt Worldwide, a consulting firm.

"While the pension funding environment desperately needs fixing, we believe that the administration's proposal will likely damage an already weakened defined-benefit system," said Sylvester Schieber of Watson Wyatt.

PBGC Executive Director Bradley Belt said the administration is sensitive to the negative impact of legislation. But the United situation "is a wake-up call," he said. "We have to have tougher funding rules, we need more transparency in the system, and we need to address risk in a more meaningful way."

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The Weak and the Strong

Industries most and least exposed to problems in defined-benefit pension
plans.

Five Strongest

-- Software

-- Real estate

-- Biotech

-- Hotels, restaurants, leisure

-- Thrifts, mortgage finance

Five Weakest

-- Auto components

-- Auto makers

-- Airlines

-- Aerospace and defense

-- Construction and engineering

Note: Excludes industries without defined-benefit plans

Source: Credit Suisse First Boston