Steve Quayle News Alerts

April 12, 2005
By Lisa Zagaroli
Detroit News, Washington Bureau

WASHINGTON -- The federal government's insurance program for bankrupt private pension plans is in danger of going broke, adding to the retirement anxiety of tens of thousands of Michiganians who have seen pension plans canceled or fear for the future of the state's struggling industrial base.

The Pension Benefit Guaranty Corp., a safety net designed to protect American workers, swung from a surplus of $10 billion in 2000 to a deficit of $23 billion in 2004. The problems are largely due to bankruptcies in the steel and airline industries.

But there's growing concern about the ability of automakers and auto parts suppliers to meet their pension obligations. In a Wall Street Journal interview, PBGC officials last week estimated the auto sector's unfunded pension liability at $45 billion to $50 billion.

"It is a ticking time bomb waiting to explode, and the longer we wait to defuse it, the more powerful the blast will be," said Randall S. Kroszner, an economics professor at the University of Chicago, who believes the situation closely parallels the savings and loan crisis in the 1980s. "As the sad history of the thrift crisis demonstrates, the wait-and-hope policy was a disaster."

For the laid-off employees of Troy-based Oxford Automotive Inc., as for thousands of Metro Detroit retired steel workers, the federal pension backstop system emerged as a lifesaver when their jobs collapsed.

The PBGC stepped in last month and announced plans to take over Oxford Automotive's pension payments. The 2,800 employees and retirees are still sorting out details of the plan's complex funding formula, which depends on numerous factors, including the amount of assets remaining in the bankrupt company's pension fund. But they're hoping to get most of what the auto supplier had promised them over the years before filing for bankruptcy in December.

"That puts the pension worry on the back burner, compared to loss of income, loss of health care, the possibility of looking for another job and relocating," said Don Petro of Reese, Mich., a United Auto Workers union representative assigned to the Oxford Automotive employees who were based in Alma, Mich. "That's certainly a huge relief."

But without corrective action, the insurance system won't be able to pay all the lifetime benefits that it owes to the 1 million workers and retirees now owed benefits because their plans failed, and to the beneficiaries of plans that fail in the future, said Mark Warshawsky, assistant secretary of the Treasury.

The Bush administration has proposed raising the annual premiums that companies would have to pay in for each employee enrolled in a pension plan to $30 from $19, making a number of other structural changes in the pension system and increasing disclosure to beneficiaries.

The president's proposal has been subject to several hearings already this year on Capitol Hill.

At least some action is expected because the interest rate that pension plans use to calculate their liabilities expires this year. Initially, it was linked to the 30-year Treasury bond rate, which has become obsolete. The government is using a long-term corporate bond, but that temporary fix expires after 2005.

The Bush administration wants to use a measure that reflects the likelihood a company will have to convert large sums of its pension investments into cash, based on the age of its employees.

Rep. Dave Camp, R-Midland, chairman of one of the House subcommittees that oversees the PBGC, said he's optimistic Congress will enact a long-term solution this year.

An overall solution would be welcome news to the business community, which has been aggressively lobbying for funding reform. "The auto industry goes through cycles, so in good years, you want to have the flexibility to contribute a little more, and in tough times, you want to have the flexibility to make it up a little later," said John T. Anderson, director of Washington affairs for Delphi Corp. "The other piece of that is predictability. You want to know what your obligation is so you can plan for other things as well."

Still, there are deep divides in how to fix the pension board's financial woes. A particularly controversial provision in the Bush administration proposal would link a company's credit rating with its payment obligations, requiring more money from the most risky firms.

"It is only natural that pension plans with sponsors that fall into this readily observable, high-risk category should have more stringent funding standards," Warshawsky said. That could have harmful effects in Michigan for one of the nation's largest employers. General Motors Corp. is one level above "junk" status and could be lowered at any time, analysts say.

Business leaders say basing the premium rules on creditworthiness could cause permanent harm to some employers.

"Many companies that are not considered 'investment grade' by the credit rating agencies nevertheless continue, year after year, to generate cash, pay their employees, pay their bills and fund their pension plans," noted Kenneth W. Porter, director of global benefits at the DuPont Co.

Alan Reuther, legislative director of the United Auto Workers union, told lawmakers that Bush's plan to link payment levels with a company's credit rating would be further incentive for employers to stop funding or even offering pension plans.

"They would punish employers who are already experiencing financial difficulties, resulting in more pension plan terminations and loss of retirement benefits, more bankruptcies, plant closings and layoffs, more liabilities being dumped on the PBGC, and more employers choosing to exit the defined benefit pension system," he warned.

There's plenty of reason to believe that traditional pensions won't be a standard benefit for future U.S. workers.

About 16 percent of the nation's private work force, or about 34 million Americans, are now covered by corporate pensions, more formally known as single-employer, private-sector defined pension plans, according to the Labor Department.

The number of private-sector defined benefit plans reached a peak of 112,000 in the mid-1980s, when about a third of American workers had an employer-paid pension program, said Bradley Belt, executive director of the PBGC.

In less than two decades, 101,000 employers have terminated their defined-benefit plans.

About 99,000 of them covered the benefits by purchasing annuities. Many of them replaced the benefit with employee contribution plans such as a 401(k). Some companies are switching to so-called hybrid plans, such as cash-balance benefits, which pay an employee a percentage of his or her salary plus interest, but a court case accusing IBM of discriminating against older workers with a similar plan has stalled corporate movement along that path until it is resolved

In the other 2,000 cases, the PBGC took over the pension liabilities.

Pension investments typically become underfunded because they are invested too heavily in the volatile stock market; because companies escalate their retirement promises due to labor market or union pressures; or because companies choose to remain underfunded because the law allows them the flexibility to do so, said Douglas J. Elliott, president of the Center on Federal Financial Institutions. The center is a think tank that focuses on government lending and insurance programs such as the PBGC.

On average, PBGC takeovers involve situations when assets have accounted for half of the liabilities.

"It's really been a combination of factors," Belt said. "Benefits continued to accrue; they weren't putting in that much cash in the pension plans, sometimes none at all; the liabilities were growing because interest rates were coming down and asset values were falling, but they still had to pay out benefits as well."Many of the 30,000 existing pension plans are in mature industries with a growing number of retired workers, Belt said, increasing the concern about the long-term health of the agency.

Failing to fix the system would have ripple effects throughout the business community, he said.

"Not only will healthy companies that are responsibly meeting their benefit obligations end up making transfer payments to weak companies with chronically underfunded pension plans, they may also face the prospect of having to compete against a rival firm that has shifted a significant portion of its labor costs onto the government," Belt said.

The consequences can be unfortunate for individuals, who in some cases can lose more than half of their earned monthly benefit because of legal limits on what the pension insurance program can pay, Belt said.

For example, when the agency announced last month that it would take over pensions of 36,000 United Airline employees, it said it would cover only $2.1 billion in benefits of the funds' $2.9 billion shortfall. The airline plan had $1.2 billion in assets to cover $4.1 billion in benefit promises.

The UAW's Reuther noted that the PBGC was created after a single bankruptcy -- the Studebaker auto company -- in the early 1960s, and was never designed to handle large-scale failures of entire industries. He thinks Congress ought to consider paying for the fix with tax dollars gradually over 30 years.

"The steel and airline bankruptcies and pension plan terminations were caused by many factors, including the policies, or nonpolicies, of the federal government relating to trade, deregulation, energy and health care, as well as the shocks flowing from the terrorist attacks on September 11," he said. "In our judgment, it is entirely appropriate to now ask the federal government to help pay for the pension costs flowing from those policies and events."

Petro, the UAW representative for Oxford Automotive workers, wonders why Congress can pass a bankruptcy bill to make sure individuals pay all their debts, but they haven't addressed corporations walking away from their pension obligations.

"They need to make sure the pensions are properly protected," says Don Petro, a UAW union representative.

More than 200 Michigan companies have had their pension obligations taken over by the government since the 1974 establishment of the Pension Benefit Guaranty Corp., an agency that insures about 31,200 private pension plans nationwide in the event an employer can't meet its pension promises due to bankruptcy or other financial difficulty.

• 23,796 individuals in Michigan receive payments from the PBGC.

• 25,221 additional state residents will be paid pension benefits from the agency when they reach retirement age or otherwise become eligible.

• Payments to Michigan residents in the 2004 fiscal year totaled about $117 million.

• Michigan companies that have had their plans taken over include Thorn Apple Valley, Elias Brothers, Jacobson Stores, Southwest Detroit Hospital and the Easter Seal Society of Wayne County.

Source: PBGC

http://www.detnews.com/2005/business/0504/12/A01-147922.htm