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Underfunding of Pensions Could Exceed $80 Billion

From Reuters, Los Angeles Times, September 5, 2003

U.S. finds the viability of the agency that insures plans for 44 million Americans is at risk.

Pension underfunding at troubled U.S. companies has doubled this fiscal year and could exceed $80 billion, with airlines accounting for nearly a third of the shortfall, the government said Thursday.

The alarming trend further threatens the health of Pension Benefit Guaranty Corp., the agency that insures retirement plans for 44 million workers and retirees.

After recent mammoth bailouts of pension plans, particularly those of several large retailers and steelmakers, the agency has seen its own deficit balloon by $2 billion in the last year to a record $5.7 billion.

"Although the PBGC has enough resources to make benefit payments for the near future, this poses a serious question of whether a taxpayer bailout of the agency would be necessary if its financial condition continues to deteriorate," said Rep. John A. Boehner (R-Ohio), who chaired an Education and Workforce Committee hearing on the issue.

The agency will be responsible for paying benefits to nearly 1 million people this year, including pilots at US Airways whose retirement plan was terminated this year to enable the company to exit bankruptcy.

Pension claims against the agency in 2002 were greater than the total claims for all previous years combined, said its executive director, Steven Kandarian.

Kandarian agreed with a General Accounting Office finding Thursday that the agency's long-term viability was in question. Kandarian said companies may have to reduce benefits or increase premiums to the government unless Congress takes meaningful action.

Legislation allowing companies to assume a more generous return on pension funds for three years — until a more permanent formula is devised — is moving through the House, but no similar measure is before the Senate.

Kandarian said his agency was working with the Labor, Treasury and Commerce departments to devise proposals eliminating rules that have encouraged companies to shift risk to the government or delay contributions to plans.

Funding rules allow "contribution holidays" in hard economic times for even seriously underfunded plans, Kandarian said. The rules also make it difficult to build a surplus in good times.

Underfunding at troubled companies — defined as those whose debt is rated below investment grade, or are otherwise at risk — could exceed $80 billion by the time the fiscal year ends Sept. 30, Kandarian said, up from $35 billion last year.

A sluggish economy, falling stock prices and low interest rates have contributed to the growing liabilities of traditional defined pension plans that promise a fixed amount at retirement based on salary and years of service.

Airlines, including United Airlines Corp., which is in bankruptcy protection, have underfunded liabilities of $26 billion, he said.

Steel companies and the U.S. auto industry also were identified as pockets of severe pension underfunding.