Federally Insured Pensions Under Assault

Jan. 27, 2003

The Pension Benefit Guaranty Corporation, an agency that insures the pensions of some 44 million Americans, has depleted its entire $8 billion surplus in one year, according to a report in the New York Times.

The agency that protects the retirement incomes in more than 35,000 private defined benefit pension plans reportedly can continue to make its current payments, but is expected to disclose a deficit of $1 billion to $2 billion at the end of this month.

When a plan insured by the PBGC is terminated without enough assets -- usually owing to a company’s bankruptcy -- the agency takes over the plan and pays benefits according to limits set by federal law. At present the agency is allowed under law to pay a maximum of $3,579.55 a month or $42,954.60 a year.

The rough going for the agency has become even more turbulent as more and more bankrupt companies default on retirement plans pledged to present and future retirees.


Among the notable companies fueling the emerging crisis: US Airways, United Airlines and K-Mart, all of which have disclosed large under-funded pension plans.

Another blow to the agency’s hard-pressed assets occurred when it took control of the bankrupt LTV Corp.’s pension plan -- the largest takeover in the agency’s history. The steel company presented the agency with $1.6 billion in liabilities, covering almost 83,000 workers and retirees.

Other liabilities amassed last year from defaulting pension plans included $321 million from Polaroid Corp., $219 million from Anchor Glass Container Corp. and $124 million from Reliance Insurance Co.

Also adding to the distress: Bethlehem Steel Corp., which will strap the agency with yet more liabilities -- $3.7 billion covering 95,000 workers and retirees. Meanwhile, National Steel Corp. is slated to tag the agency with another $1.1 billion bill covering 35,000 workers.

“This is really the first time the PBGC has been faced with this confluence of events,” Mark A. Oline, a managing director of Fitch Ratings, told the Times. He further noted that he last time a three-year bear market coincided with low interest rates was 1939 to 1941, a time when the agency did not exist.

“The big question is: if all of a sudden these liabilities have become so enormous, how is this situation addressed?” Oline added.

Ultimately, the agency may have to turn to Congress for changes to safeguard its long-term financial health, as the losses enumerated above and other financial hits from a sagging economy move to exhaust the PBGC.

PBGC has estimated that pension plans it insures had at the end of last year about $300 billion in un-funded benefits, a sum markedly up from $164 billion in 2001 and only $39 billion in 2000.

Emergency Action?

But despite the potential for even more dramatic red ink, business groups reportedly question whether there is any need for immediate congressional action.

"While the PBGC has experienced a real change in its position, the existence of a deficit does not indicate an inability for it to meet its long-term financial obligations," said James Delaplane, a partner with the law firm of Davis & Harman in Washington, recently advised Business Insurance.

Despite the doom and gloom, the PBGC has sufficient assets to pay current benefit obligations for the next 17 years, she added.

Some of the ideas currently on the table to stabilize the agency include:

* linking the amount of the PBGC premium to the type of assets held by pension plans, with higher premiums imposed on plans with more volatile assets, such as equities;
* linking, at least in part, the premium rate an employer pays to its financial condition;
* increase across the board the premiums participating companies pay for each person covered by the insurance;
* asking businesses to simply put more cash into their own pension plans;
* increasing fees for pension funds;
* limiting the ability of under-funded plans to increase benefits;
* requiring unionized pension plans to set aside money for projected rather than actual liabilities;
* and with the 30-year Treasury bond on the way out as a benchmark, some businesses leaders have advocated switching to a high-quality corporate bond as the benchmark. That bond rate would be higher, having the effect of shrinking future pension liabilities.

Experts agree, however, that any overly zealous increase in premiums might prompt companies might to stop offering pensions altogether.

Currently, the agency takes in some $800 million each year in premiums.

In any event, many in the industry are taking a wait-and-see attitude, relying upon the belief that interest rates will rise again and cut back the deficit figures as dramatically as they rose in the first place.

Any changes in the status quo would have to be approved by Congress.

http://www.newsmax.com/archives/articles/2003/1/26/181045.shtml