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Rude awakening

Bethlehem workers hurt by company's bankruptcy

By Fred O. Williams, The Buffalo News

September 30, 2003

How solid is your pension? Company-backed pension plans are hitting hard times now, and that could mean trouble for tomorrow's retirees.

There's little you can do to shore up your corporate pension. But you can find out how healthy the plan is - or isn't - and compensate for its shortcomings with your own savings, financial planners say.

"People are concerned about everything - the soundness of Social Security, pensions, health care," said Paul Eberz, a financial planner in Amherst .

Employer-backed pensions should be viewed with a skeptical eye, he said, like other retirement benefits that lie outside your control. Federal insurance for pensions is limited, and some employers are changing their plans in ways that reduce future benefits.

Pension problems are concentrated in "defined benefit" plans, essentially a company promise to pay benefits years into the future.

"Defined benefit plans tend to be in older industries," said David H. Myers, assistant professor of finance at Lehigh University in Bethlehem , Pa.

In other words, Buffalo 's core employers. Some of the region's biggest companies have some of the biggest pension shortfalls. General Motors Corp. owed its plan $19 billion at the end of last year, while Delphi Automotive System faced a funding gap of $4.1 billion.

The collapse of Bethlehem Steel gave Buffalo a taste of the nation's pension crisis. The steelmaker's bankruptcy put its pension into a federal takeover in December. Most private-sector pensions are backed by the Pension Benefit Guaranty Corp., or PBGC, with exceptions for church groups and plans with fewer than 26 people.

But while the guaranty agency backs pensions for 44 million people, the safety net can be a far cry from what workers counted on.

"When the PBGC is forced to take over underfunded pension plans, the burden often falls heavily on workers and retirees," Steven A. Kandarian, executive director of the pension agency, said in congressional testimony Sept. 15.

Delay in benefits

Ask Bob Murtiff, who worked at Bethlehem for 29 years before it closed its coke oven in Lackawanna in 2001. Under company rules, he would have been eligible for full pension benefits by now. But because of the federal takeover, he'll have to wait until age 62 to collect full benefits.

"I'm out of unemployment, out of health benefits," Murtiff said. As for other income, "try to find a job at 49 years old."

Federal insurance drops steeply for younger retirees. The pension agency's maximum monthly payment for retirees at age 65 is $3,664. The maximum for a 55 year-old is $1,649. Those retiring younger than 55 would receive an even smaller fraction of what they had expected if the plan remained solvent.

Murtiff meets for breakfast sometimes with a group of former co-workers who are also shut out of retirement benefits. Several missed a full pension by inches - most had 28 or 29 years of service when the coke oven shut down.

"They told us for 30 years, "don't worry about the pension, it's guaranteed by the federal government,' " said Gary Bogner, one of the group from the coke oven. "None of us looked at the fine print."

Now, even the limited federal safety net may be at risk. High-cost failures like Bethlehem 's have socked the pension guaranty agency with billions in losses, earning it the designation of an "at-risk" program from the General Accounting Office. Congress is expected to shore up the agency, but the shortfall raises the question of whether insurance will be scaled back in the future, experts say. Plans face shortfall

Defined benefit plans calculate your monthly payment based on years of service and the age at which you retire. Because of falling interest rates and stock prices, many of these plans are underfunded, meaning they don't have enough now to pay all their future benefits. According to the pension guarantee agency, U.S. plans face a combined funding shortfall of $350 billion. In a survey of 100 large corporate plans by analyst Millman USA , 87 were underfunded in 2002, up from 60 in 2001.

"When interest rates are very low and stock prices are low, the funding gap is at its widest," said Michael Alderson, finance professor at Saint Louis University who studies pension plans.

An underfunded plan isn't necessarily in danger of running out of money soon. Plans can get healthier as economic conditions improve, and as the employer puts more money into the fund, he said.

But without contributions or an upturn in economic conditions, an underfunded plan won't be able to pay all its obligations when workers retire. When that's the case, companies must contribute big sums to close the funding gap.

Faced with the prospect of huge contributions, some companies are changing the rules to limit future benefits. While they can't rescind benefits you've already earned, plans can change the formula for benefits you earn in future periods, Myers said.

Some employers are transforming their pension to a "cash balance" plan, a type of defined benefit plan that creates an account for each participant. The account is credited annually with contributions from the employer and earned interest. Cash-value plans aren't supposed to cut benefits, but they have sparked lawsuits charging unfairness to older workers, Myers said.

Beware of changes in plan

With pension administrators looking for ways to reduce their burden, it becomes important to watch for changes in your plan. Participants should be notified of changes in a formal statement from the plan administrator called a Summary of Material Modifications, according to the PBGC.

How do you find out more about your plan?

You may not have a say in how pension funds are managed, but you have a right to know what's happening to the money. The Employee Retirement Income Security Act (ERISA) spells out the information that plans must make available to beneficiaries.

Each year the plan administrator should provide a summary annual report. Other documents are available from the administrator or the Labor Department.

If your plan is insured by the PBGC and is underfunded by 20 percent for the past year or more, your employer is supposed to give you a written notice. The notice should explain the percentage underfunded - the gap between the plan's assets and what it will need to pay future benefits. The notice should also spell out the limitations of PBGC insurance.

Knowing your pension's limits is an important step toward making your own financial plan for retirement, experts said. Some companies are starting 401(k) retirement savings plans alongside their traditional pension.

"Don't forgo the opportunity to save for your own retirement," Alderson said.

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