When companies default on their plans, usually in connection with bankruptcy proceedings, the government-sponsored Pension Benefits Guaranty Corporation assumes responsibility and pays benefits to retired workers, often at a discounted rate.
But the PBGC is now itself insolvent, and Congress is passing legislation to force companies with defined-benefit plans - most of these in the unionized auto, steel, airline, and other manufacturing industries - to pay higher premiums to the agency. The Journal and the corporations it speaks for want taxpayers to foot the bill, and are threatening higher premiums will serve as further incentive for companies to abandon or gut their plans. This is not a difficult maneuver, given the cooperation of the bankruptcy courts and often the PBGC and sometimes the beleaguered unions themselves, as the latest default by United Air Lines - the largest in US corporate history - demonstrates.
Regardless of the degree to which the state steps in to partially salvage the plans, an immense crisis faces aging industrial unionists dependent on their company pensions, the result of decades of struggle to set aside "deferred earnings" for retirement - especially if there is a major economic downturn and wave of corporate bankruptcies.
MG ------------------------ Looking to Keep Pension Agency Solvent, Congress Fears Backlash
By MICHAEL SCHROEDER Staff Reporter of THE WALL STREET JOURNAL May 12, 2005
While UAL Corp. was getting approval this week to dump United Airlines' pension woes on the federal government, Congress was working to make that a harder act to follow for other companies with underfunded pension plans. In dealing with the growing problem, though, legislators face a tough balancing act.
Congress has been drafting legislation that would strengthen the finances of the beleaguered Pension Benefit Guaranty Corp., the federal agency that insures private-employer defined-benefit pension plans. It's the PBGC that would be responsible for $6.6 billion of United's unfunded pensions.
Last year, the PBGC had $62.3 billion in long-term obligations to pay workers' pensions, but only $39 billion in assets taken over from failed employer plans. The $23.3 billion shortfall was double the previous year's gap.
The legislation being drafted likely would make thousands of companies with defined-benefit pension programs -- that is, plans that provide workers with a set amount each month, based on wages and number of years on the job -- pay much higher premiums to the PBGC. Chances are the changes would affect companies with shakier plans, as well as those with healthier ones.
But while the legislation could shore up the PBGC's finances, lawmakers must avoid steps that could give companies another reason to abandon defined-benefit plans by making it even more costly to keep them afloat.
The upshot is that the government's pension safety net faces not only severe strains, but also significant changes in how it works.
Congress is acting because the prospect of more bankrupt pension plans would plunge the PBGC, which already has billions of dollars more in commitments than it can cover, even more deeply into the red -- and raise questions about whether a taxpayer bailout will be needed down the road. Employer groups warn that companies will be tempted to freeze or end their plans if they're compelled to pay higher premiums.
More than two-thirds of large companies, typically those in unionized industries, offer defined-benefit pension plans. According to the PBGC, defined-benefit plans cover 20% of private-sector workers at companies of all sizes -- down from 40% two decades ago.
On Tuesday, a Chicago bankruptcy court cleared the way for the largest pension default in U.S. corporate history by approving United Airlines' proposal to turn four underfunded employee pension plans and their costs of $6.6 billion over to the PBGC.
Such defaults, along with the bursting of the stock-market bubble five years ago, have exacerbated financial strains for the agency. Meanwhile, pensions' funding shortfall across the U.S. economy is much larger. Taken together, the defined-benefit pension plans that the PBGC guarantees are underfunded by a total of $450 billion, the agency estimates. Airlines have a shortfall in their pension plans totaling more than $31 billion, the agency says. (Of course, these liabilities could drop significantly as interest rates rise and the investments in the PBGC's funds enjoy the same strong returns that have boosted private pension assets during the past two years.)
By far, the industry accounting for the biggest portion of underfunding is auto makers and automotive-parts companies. The plans of those companies are $45 billion to $50 billion shy of promises made to workers.
Delphi Corp., the No. 1 U.S. auto supplier, is struggling with declining sales at its top customer and former parent, General Motors Corp., plus big pension obligations and higher raw-materials costs. Delphi has an unfunded pension liability of $4.3 billion and $9.6 billion in retiree health-care liabilities, according to its fourth-quarter earnings statement.
The PBGC was created by Congress in 1974 after some high-profile auto-industry bankruptcies -- including Studebaker-Packard Corp. -- left retirees without pensions. Its mission is to guarantee, up to a point, defined-pension plans. (It's currently the trustee of 3,500 plans with about one million participants.)
If a pension plan shuts down without enough money to meet its obligations, the PBGC guarantees up to $45,614 annually for employees who retire at age 65. Often, companies replace those plans with a new defined-contribution program, such as a 401(k).
The vast majority of plans taken over by the PBGC have been from companies that have been liquidated. In those cases, the PBGC asks the bankruptcy courts to agree to turn over the pension plans to the agency. In other cases, companies on their own can use bankruptcy proceedings to convince the judge that they can't survive without shedding their pension liabilities. The PBGC must accept the court's rulings. Also, the PBGC can initiate a pension-plan takeover by going to court and asking for the termination of company plans.
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