U.S. Pension Agency Says It May Need a Bailout

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U.S. Pension Agency Says It May Need a Bailout

By Kathy M. Kristof, the Los Angeles Times

October 15, 2003

The troubled government agency that stands behind the nation's corporate pension plans is suffering mounting losses and could be forced to seek a taxpayer bailout, the agency's director said Tuesday.

Likening the situation to the savings and loan crisis of the 1980s, the director of the Pension Benefit Guaranty Corp. told Congress that without structural changes the system would collapse. The agency, which insures retirement plans for 44 million American workers and retirees, is running a record deficit of $8.8 billion — a dramatic jump from the $5.7-billion shortfall the agency forecast earlier this year.

The prime culprit: a series of major bankruptcies, mainly involving airlines and steel companies that required the agency to step in and assume the costs of funding the companies' pensions.

"Pension claims against the PBGC for 2002 alone were greater than the total claims for all previous years combined," Steven A. Kandarian, executive director of the agency, told the Senate Special Committee on Aging. "At current premium levels, it would take about 12 years of premiums to cover just the claims from 2002."

The testimony chronicled the problems that have beset the nation's defined-benefit pension system, including company-funded pension plans that promise workers a set level of benefits during retirement. Three years of stock market losses have devastated corporate pension plans' investment portfolios as falling interest rates and rising life expectancies have played havoc with efforts to match shrinking pension assets to expected benefit payouts.

Those factors have pushed pension funding to a crisis point, experts say, with the pension agency estimating that corporate America 's pension liabilities exceed its assets by about $350 billion.

The agency is funded through premiums paid by employers with healthy defined-benefit pensions. If business failures continue at their recent pace, Kandarian said, the premiums charged to those plans could prove prohibitive and drive them out of the system. At that point, the only answer would be for Congress to call on taxpayers to make up the shortfall, just as they did when the savings and loan industry couldn't cover the losses of failing thrifts.

Some industry experts countered that Kandarian's assessment was far too dire. The recent stock market recovery and rising interest rates have helped boost pension funding levels in 2003, and Congress is weighing rules that could ease pension funding further, said Jan Jacobsen, director of retirement policy at the American Benefits Council, which represents the nation's largest employers.

"The PBGC has enough money for years and years into the future," Jacobsen added. "It's not an immediate crisis."

Today's pension situation is better likened to the Social Security crisis, said Norman Stein, a pension expert at the University of Alabama .

The agency has enough money to cover claims for several years, Stein said. "But if we don't address this problem now, we are going to saddle future generations with a huge burden."

Congress has been weighing a series of measures that would affect how pension obligations are calculated and disclosed. However, the only measure that appears to be making headway is one that temporarily would change the interest rate used in determining a company's pension obligations. This would allow companies to contribute less to their plans, Stein noted.

The Bush administration supports that measure but has been pushing to couple it with greater pension transparency, so funding problems would be more apparent to both employees and regulators. Employers are vehemently opposed to the administration's proposals on disclosure and funding calculations.

"There is a huge tension right now between employers and the PBGC," said Paul Gewirtz, partner with accounting firm Ernst & Young. "Employers want relief from their pension funding requirements that many companies simply can't afford. But the PBGC is extremely upset about that because the more you give relief on pension funding requirements, the worse off these plans become."

Meanwhile, glitches in current rules allow companies to legally operate their plans at distressingly low funding levels, without making new contributions, Kandarian said. The way funding levels are calculated also is faulty, he said.

For instance, immediately before it failed, Bethlehem Steel Corp.'s plan reported that it was 84% funded on a current liability basis. At termination, the plan was only 45% funded, with unfunded liabilities of $4.3 billion.

When the pension agency took over the US Airways Group Inc. pilots' plan, it reported that it was 94% funded, Kandarian said. But at termination, it was only 35% funded, with liabilities exceeding assets by $2.2 billion.

Neither company was required to put money into its pension plan in the years leading up to the plans' failures, Kandarian added.

Although only about 20% of Americans are covered by defined-benefit pensions, the effects of the system's failure would be widespread because taxpayers ultimately are responsible for the pension agency's guarantees, said Sen. Charles E. Grassley (R-Iowa), chairman of the Finance Committee. "The taxpayer is the insurer of last resort."