Few Guarantees for Corporate Pension Plans

A key government program that helps employees finance their retirement is reaching crisis stage. No, not Social Security, which even the most dire economic forecasts show has years to run before running low on cash. It's the Pension Benefit Guaranty Corp., the quasi-federal agency that insures corporate pension plans and which is buckling under a record $23.3 billion deficit.

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A key government program that helps employees finance their retirement is reaching crisis stage. No, not Social Security, which even the most dire economic forecasts show has years to run before running low on cash. It’s the Pension Benefit Guaranty Corp., the quasi-federal agency that insures corporate pension plans and which is buckling under a record $23.3 billion deficit. And it’s only going to get worse. The PBGC must continue assuming responsibility for the pension assets of bankrupt companies that have terminated their plans. Waiting is the proposed termination of three pension plans by bankrupt UAL Corp., the parent of United Air Lines Inc., that would saddle the agency with about $5 billion in pension payments. It would represent the biggest corporate pension default in history. On Dec. 30, the PBGC took over one of United Air Lines’ pension plans. The retirement plan for the airline’s pilots was underfunded by $2.9 billion. The PBGC said it would likely be liable for about $1.4 billion in guaranteed benefits, the third-largest claim in the history of the agency’s program. “If the PBGC continues along the path that it is going now, Congress is going to have to look at a ‘Savings and Loan’-type bailout,” said Judge William Bodoh, who retired from the U.S. Bankruptcy Court for the Northern District of Ohio, Eastern Division, in Youngstown and is now counsel to Frost Brown Todd in Columbus, Ohio. The alternative, Bodoh said, is to change U.S. bankruptcy law so that Chapter 11 filers cannot dump their pension plans onto the PBGC. “It just seems to me that one of two things is going to have to happen,” he said. And the latter is “less likely than the alternative of an S&L-type bailout.” The Bush administration unveiled its pension reform proposal last week and said lawmakers in the House and Senate have committed to taking up the issue this year. The president’s plan includes three key elements: reforming the funding rules, which govern how much money an employer must put in a pension plan; increasing disclosure to workers, investors and regulators to ensure greater transparency and accountability; and reforming the premium system. The pension premium payment system would be revamped to better reflect the real cost and risk of a particular company’s plan. Additionally, financially troubled companies with underfunded plans would be required to pay heftier premiums, said U.S. Labor Secretary Elaine Chao, who unveiled the reform proposal in a speech last week. She sits on the PBGC board of directors. In 2004, Congress crafted a two-year fix that President Bush signed into law in April. That law replaces the 30-year Treasury bond interest rate formerly used to make pension-funding calculations with a corporate bond rate — a change that let companies contribute $80 billion less to their pension plans. It also allows several steel and airline companies to pay in the first year of the moratorium only 20 percent of the catch-up payments, formally “deficit reduction contributions,” that become mandatory when company pension coffers fall below 90 percent of their required funding. The companies would pay 40 percent of the DRC payments in the second year. Congress, meanwhile, has said it would overhaul the pension system instead of bailing it out. Rep. John Boehner, R-Ohio, chairman of the House Committee on Education and the Workforce, said a House bill would likely include a permanent interest rate fix and a requirement that companies fully fund plans. Current federal rules force companies to make additional pension contributions during difficult economic times. Legislation also would likely move to bar companies from skipping pension payments in boom periods if they meet minimum funding standards; require greater disclosure to workers about the status of their pension plan; and give pensions more priority in bankruptcy proceedings. In the Senate, Finance Committee Chairman Charles Grassley, R-Iowa, said one of his committee’s priorities is to adopt a permanent interest rate for use in calculating pension liabilities. “The temporary corporate bond rate that we enacted [in 2004] will expire at the end of 2005, and it’s critical that we find a permanent replacement as soon as possible,” Grassley said in a recent statement outlining his committee’s agenda for the new Congress. Still, Bodoh remains skeptical that lawmakers will ride to the PBGC’s rescue. “I believe politicians don’t deal with problems — they deal with the politics of problems,” they said. “I don’t think Congress is prepared to fundamentally rethink how pension plans are set up and funded. Copyright �2005 TDD, LLC. All rights reserved.

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