Pension Agency Piles Up Record-Setting Deficits

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Pension Agency Piles Up Record-Setting Deficits

By Albert B. Crenshaw, The Washington Post

January 16, 2004

The federal government's pension insurance arm yesterday said its financial position continued to deteriorate last year, to the deepest deficit in the agency's history.

The agency operates two insurance programs, one for pensions operated by individual companies and a second, much smaller one for multi-employer plans of the sort widely used in the construction and trucking industries. The single-employer program, which was in surplus throughout the late 1990s, had posted a deficit of $3.6 billion in 2002. Officials said yesterday that the deficit deepened to $11.2 billion last year.
And for the first time since 1981, the multi-employer program also sank into the red, showing a deficit of $261 million, down from a surplus of $158 million in 2002.

The Pension Benefit Guaranty Corp., or PBGC as the agency is known, insures so-called defined benefit pensions -- plans that promise a certain benefit based on a formula typically linked to pay and years of service. It does not cover increasingly popular retirement savings plans such as 401(k)s.

Despite the deficit, the agency will be able to pay promised benefits for many years, officials said. But there is a concern that eventually, if the situation does not improve, taxpayers could be called upon to bail out the agency.

The largest single factor in the increase in the single-employer program deficit was $5.4 billion in losses resulting from the agency's takeover of failed plans. During the year the agency took over 152 plans, including the US Airways pilots' plan, with unfunded liabilities of $2.5 billion; National Steel, with about $980 million in underfunding; and Weirton Steel, with $800 million in underfunding.

In addition, the agency estimates it is "reasonably possible" to expect an additional $85.5 billion in claims in the future because of underfunding at plans run by companies that are themselves in trouble. That figure is up from $35.4 billion last year.

The agency's executive director, Steven A. Kandarian, said he and officials from the departments of Labor, Treasury and Commerce who have been studying the pension system are nearly ready to present a comprehensive reform package to President Bush. Kandarian declined to provide details of the proposal yesterday, but it is widely expected to include tougher funding requirements for companies that sponsor pension plans, meaning they would have to put up more money sooner against future pension debts.

"Pension promises made by . . . companies ought to be kept by those companies," Kandarian said yesterday.

Many of the nation's roughly 30,000 pension plans are underfunded, primarily because of the weak stock markets of recent years and current low interest rates. Funding is gauged by adding up the value of a plan's assets and subtracting from that sum the present value of the payments it has promised in the future. Such present value calculations involve use of an interest rate, and the lower the rate the higher the value of the liabilities. In today's environment, with the stock market still well off its highs of 2000 and interest rates extremely low, the funding picture remains poor.
Those factors also contribute to the size of the agency's deficit. Kandarian acknowledged that an economic rebound, strong market and higher interest rates could change the pension picture dramatically, but based on agency simulations of various possible economic scenarios, the chances of that are not great, he said.

While the Bush administration may propose tightening funding requirements, corporations have been pressing Congress for more relaxed standards, especially on what interest rate to use in liability calculations. They argue that forcing companies to step up funding unnecessarily would cause many to drop their pensions.

"The worst thing lawmakers could do would be to enact legislation that makes the termination of seriously underfunded plans a self-fulfilling prophecy. Accordingly, any effort to impose unduly burdensome new funding rules on plans could unintentionally backfire and make it impossible for those sponsoring companies to continue their plans," said James A. Klein of the American Benefits Council, a group representing many pension plan sponsors.