Corporations seek creative pension solutions

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Corporations seek creative pension solutions

By Rachel Beck, The Olympian

August 27, 2003

Critics wonder whether cashless funding is good or bad for faltering retirement plans

U.S. Steel is strapped for cash but still has to shore up its underfunded pension plans. Its solution: Use land instead. Timberland, to be exact, 170,000 acres in all.

That's surely thinking outside the box, something businesses are being forced to do as they try to cover the shortfalls in their pensions.

But the creative route isn't without risk. There is a chance plans could end up worse off.

Low interest rates combined with steep declines in the stock market in recent years have caused a corporate pension crisis.

That only affects companies' defined benefit pension plans, which promise future pension payments to employees. Unaffected are defined contribution plans, such as 401(k)s.

A pension plan is considered underfunded when its obligations exceed its assets by at least 10 percent. At that point, companies are required to make up the shortfall.

But doing that isn't so easy, especially given the cash crunch many companies are facing amid weak business conditions caused by continuing lackluster economic growth.

"This is creating a real bind for any company that is struggling," said John Blossom, president of retirement plan administrator Alliance Benefit Group in Peoria, Ill. "While their corporate earnings are low, their pension contributions are higher."

That's led some to seek out cashless funding alternatives.

However, the Employee Retirement Income Security Act generally prohibits non-cash contributions to pensions from being given cash value. The Labor Department makes rare exemptions in the interest of workers and retirees covered by a particular plan.

That's what happened this past week when Northwest Airlines won permission to use stock from its privately held regional affiliate, Pinnacle Airlines Corp.

Northwest's pension plans cover about 73,000 employees and retirees. The airline wants to use the stock to cover $223 million it owes the plans for 2002. The company has obtained a waiver to pay about $450 million in 2003 obligations over five years.

U.S. Steel, meantime, is waiting for approval for its plan to transfer the timberland to its pension funds.

The steelmaker said it has roughly valued the forests at $100 million. And CEO Thomas Usher, in a conference call with analysts earlier this month, said the trees are so young their value will "grow over time."

Other cash-strapped companies, including Navistar International, have recently used company stock to supplement their pension contributions.

All these funding efforts may very well help resolve some corporate pension troubles, but concerns still loom over such creativity.

Take the case of Northwest. The good news is that an independent fiduciary has been retained to establish the fair market value of the Pinnacle stock and determine whether it is a prudent investment for the plan.

Still, Pinnacle's primary business is operating flights for Northwest under a code-share arrangement. That puts the pension plan in a potentially precarious position should Northwest be hit with any financial troubles.

"If something happens to Northwest, then what?" said Joseph Macaulay, senior consulting actuary at Diversified Investment Advisors, an investment advisory firm.

Pension experts say the key to success with cashless alternatives is for appraisers to factor in all that can go wrong when calculating valuations. It's also crucial to determine who is going to take responsibility should the value tumble.

Should everything go as planned, these assets could even turn out to be a boon to struggling pensions. That would surely be making good out of a bad situation.