Pension Insurer Cites $3.6 Billion Deficit and Suspects Worse

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Pension Insurer Cites $3.6 Billion Deficit and Suspects Worse

By MARY WILLIAMS WALSH, NY Times

January 31, 2003

WASHINGTON, Jan. 30 — The agency that insures company pension plans reported a $3.6 billion deficit today, its largest ever, and said it was studying whether the way businesses now calculate pension values was masking even deeper weaknesses in the system.

The Pension Benefit Guaranty Corporation, which insures retirement benefits for about 44 million Americans, has had a rapid financial reversal over the last year, having finished 2001 with a $7.7 billion surplus. Its deficit, larger than expected, reflects the declining health of the many company plans that the government now insures. The agency estimates that these plans together owe $300 billion more to current and future retirees than they have the money to pay.

The greatest blow to the pension agency was dealt by the steel industry. Declining old-line manufacturers owe benefits to tens of thousands of retirees and are struggling to compete with newer rivals that do not offer pension plans. The pension defaults last year of just three steel companies erased $7 billion of the agency's surplus. The airlines also present a big problem. US Airways announced on Wednesday that it had applied to have the government take over its pilots' pension plan, adding perhaps $500 million to the agency's prospective obligations.

The agency said it still had enough money to keep making all pension payments due now, and it finished the year with $25.4 billion in assets. But the pension benefits it has promised to pay are larger and will probably grow after a year of record corporate bankruptcies.

"It is a long-term problem, not unlike Social Security, and we need to make sure we're on a sound footing," said Steven A. Kandarian, executive director of the pension agency, which insures pension plans much as the Federal Deposit Insurance Corporation insures bank deposits.

The agency's operations are financed by businesses, which pay pension insurance premiums, and not from general tax revenue. It insures conventional defined-benefit pension plans — those offering workers a preset monthly payment — and does not cover defined-contribution retirement plans like 401(k)'s.

For as long as businesses have promised pensions to their employees, some companies have failed to set enough money aside. After one pension scandal involving the collapse of Studebaker in the mid-1960's, legislation was enacted in 1974 to require companies to finance their plans.

In general, when a pension fund's assets fall and stay below 90 percent of the amount needed to pay future liabilities, the company is required to make additional contributions. Many companies find their pension funds slipping toward the 90 percent cutoff and below because of declining stock market prices and other factors.

The ensuing contributions and related costs have prompted big corporations to call for a change in the interest rate used to calculate pension values. The change they seek would reduce their overall pension deficits by a little less than half — at least on paper — according to the pension agency's projections.

That, in turn, would free companies from having to pump billions of dollars into their pension funds. But it would also make the funds look healthier on paper than they are, camouflaging any increased risk of default.

Mr. Kandarian said the agency was reviewing an alternative proposal that would try to pin down more accurately the solvency of pension plans. Each company would factor its workplace demographics into calculations of its pension liabilities. Companies with the oldest workers, who are closest to claiming their pensions, would have more rigorous financing requirements than those with younger workers.

Mr. Kandarian declined to provide further detail, saying the possibilities "are still being discussed."

Janice Gregory, vice president of the Erisa Industry Committee, which lobbies on behalf of corporations on matters pertaining to employee benefits, said she had heard only a vague outline of the alternative method and was afraid that a technical debate would slow a decision by Congress.

A temporary rule change for pension calculations has been helpful to business, but it is due to expire at the end of this year. Unless Congress addresses the issue, the obligations of businesses with pension plans could balloon on paper.

"It will be a disaster," Ms. Gregory said. "You will have plans that have to freeze benefits. You will have plans that have to terminate because they don't have the cash."