Many Wait on Congress to Fix 'Bleak' Pension Shortfall

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Many Wait on Congress to Fix 'Bleak' Pension Shortfall

By L.M. Sixel, The Houston Chronicle

January 23, 2004

Pension funds have been ailing for the past three years.

Stock market losses combined with low corporate earnings, a jump in the number of retirees and low interest rates have taken their toll, forcing companies to pony up millions more to meet pension obligations.

And, in a double whammy, employers are having to fund plans based on what some say is an artificially low interest rate that's based on 30-year government securities.

The U.S. Senate is close to voting on whether to allow employers to use a higher bond rate, which would substantially reduce their required pension contributions for the year. In the meantime, employers are considering ways to reduce their pension commitments.

Unlike 401(k) plans, traditional pensions are funded entirely by employers and provide a lifetime retirement benefit for employees.

So far, 20 percent of employers that offer traditional pension plans have frozen them, said Lynn Dudley, vice president and senior counsel at the American Benefits Council, an advocacy group based in Washington, D.C.

"It's a bleak, bleak situation," she said. "The rate needs to be changed, but for many plans, damage is already done."

For companies, the lower interest rate and the subsequent higher contribution requirements are damaging their balance sheets. It's also taking money away from expansion, she said.

A $5 billion international engineering and manufacturing company has had to hold back $81 million in case Congress doesn't approve the lower rate, she said.

This all spells trouble for the Pension Benefit Guarantee Corp., the federal agency that guarantees the pensions of 44 million U.S. workers.

The agency's losses jumped to a record $11.2 billion last year, more than three times the deficit in 2002, as the agency has had to step in and assume the pension liability for financially ailing companies such as Kaiser Aluminum, Bethlehem Steel and US Airways.

Just last month, the agency took over the pension plan of the 5,000 salaried employees and retirees of Houston-based Kaiser Aluminum Corp. after employees drained $77 million from the fund in 2002 by getting lump-sum buyouts.

That left Kaiser with one year of assets to make its pension payments instead of the three years the pension agency requires. To bring the company's pension plan current, Kaiser would have to inject $75 million just to meet the minimum funding requirements.

And retired Kaiser employees also may see their monthly benefits decline because the pension agency limits the amount of money it will pay to retirees. For example, the maximum pension a 65-year-old could receive is $44,000 per year.

According to the agency, the steel industry represents 56 percent of the pension bailouts, while the airline industry accounts for 17 percent.
But one airline wants to make sure it sets itself apart from some of its competitors that have shirked their pension responsibilities.

Last year, Continental Airlines contributed $370 million to its pension plan, substantially more than its required minimum contribution of $89 million.
"It's definitely a priority of management," said Continental spokesman David Messing, who added that the carrier used part of the cash and stock from its sale of a stake in ExpressJet Holdings to fund the pension plan.

The excess contribution also gave the airline more financial flexibility for the future. Because of the larger-than-required infusion in 2003, the airline doesn't have to contribute as much this year. But Messing said Continental plans to make a larger-than-required payment again this year.

Even with those types of contributions, the Pension Benefit Guarantee Corp. estimates that total pension underfunding is more than $350 billion.
Why? The stock market. During the 1990s, the average equity plan earned 14.8 percent annually. Employers made their contributions with their stock market earnings.

But during this decade, the average annual return is negative 8.9 percent. And with the prolonged stock market downturn, employers are running out of the time for smoothing out prior losses.

That means they have to contribute cash, Pension Benefit Guarantee Corp. spokesman Jeffrey Speicher said.

The aggregate effect is staggering. In 2000, employers contributed just over $22 billion to their plans. This year they have to cough up more than $100 billion, and by 2007, they'll owe $200 billion — and that's assuming Congress goes along with the higher interest rate.