Financial Times: Pension safety net's '$78bn hole'

Norma Cohen

Friday November 19th 2004; Page 15

The Pension Benefit Guarantee Corporation, a government-sponsored safety net, will require a Dollars 78bn cash injection next year unless Congress changes the way companies run their pension schemes, according to a new analysis.

The Center on Federal Financial Institutions, a Washington think-tank that studies US government guarantee programmes, has concluded that the hole could be as big as Dollars 100bn, if all "legacy" airlines become insolvent and collapse their pension liabilities into the PBGC.

Without greater government support, the fund risks running out of money by 2021, the study warns. The analysis comes just days after the PBGC revealed a deficit for the year ended September 30 of Dollars 23.3bn, more than twice that of the year before.

Much of the increase came from new and probable pension plan terminations.

That number, and the dire outlook unveiled yesterday, are likely to raise pressure on Congress to force companies to add more cash to pension schemes or else to reduce the level of benefits the PBGC insures.

Last year, Congress considered but rejected tougher funding standards under pressure from employers' lobbyists, particularly in the airline and auto industries, which argued that such a move would destroy jobs.

United Airlines recently announced it would no longer continue its pension scheme, which has a Dollars 6.3bn gap between the cost of retirement promises insured by the PBGC and assets available to pay for them.

The deficit was also inflated by a Dollars 1.5bn charge to reflect a rise in life expectancy among pensioners following a review by the PBGC of its own mortality projections.

The PBGC estimates that aggregate underfunding at US occupational pension plans that it insures is Dollars 450bn, up from Dollars 350bn the year before, despite a strong performance in stock markets over the past year.

COFFI had previously estimated the cost of the bail-out of the PBGC at Dollars 67bn, before the latest financial results were issued.

The PBGC's projections, which use a probability simulation known as stochastic modelling, have aimed at trying to arrive at a best estimate of the size of its deficit in 10 years' time.

Its most recent estimate, included in its annual report for 2003, shows that its current financial position is already worse than the average foreseen by 2013.

COFFI employs a model used to value insurance companies by investment banks seeking to place a value on them in the commercial market.

Even if the PBGC is shut down immediately, it would still require a Dollars 30bn injection from Congress to meet current obligations and administrative costs.

The new analysis comes as Congress is considering its legislative priorities for the coming session.

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