Wall Street Journal : Pension Agency Puts Pressure on Congress; Growing Liabilities for Airline, Steel Retirees Spur Calls for Overhaul, Bailout

Michael Schroeder

Friday January 7th 2005; Page A4

WITH FIVE U.S. AIRLINES in bankruptcy court, financial turbulence is buffeting the federal agency that guarantees workers' pensions and prompting calls for Congress to take on pension reform.

Yesterday, a bankruptcy court paved the way for US Airways Group Inc. to turn over three employee pension plans to the Pension Benefit Guaranty Corp., at a cost of $2.3 billion to the federal insurance fund.

Also, the PBGC last week took steps to immediately take over the pilots' pension plan at UAL Corp., the parent of United Airlines. The takeover is likely to cost the PBGC a total of $1.4 billion, but the agency moved to avoid paying an additional $140 million due to the accrual of benefits over time and other factors. The PBGC also sent a strong message that it will block companies from expanding benefits that the government is likely to end up paying.

The agency's growing liabilities -- which stem from the decline of the steel industry as well as troubles among airlines -- are fueling fears that a taxpayer-funded bailout of the agency is inevitable unless Congress overhauls the pension-insurance system. "At stake is the viability of one of the principal means of providing stable retirement income to millions of American workers," says PBGC Executive Director Bradley Belt.

To shore up agency revenue, the Bush administration is likely to propose increased premiums for all participating companies and even higher fees for businesses at risk of bankruptcy. To curb payouts, the administration wants to limit weak companies' ability to make new pension promises. It also may propose making it easier for companies to contribute more to their plans during flush times.

Getting the changes through Congress won't be easy. While some Republican leaders say they are ready to push for an overhaul, business groups and labor unions are raising concerns about how far the changes should go. Employer groups and unions say that imposing higher premiums or stiffer rules could prompt some companies to freeze or eliminate pension plans.

"You don't want rules so onerous that they compel" companies to terminate plans, says James Klein, president of the American Benefits Council, which lobbies for companies on pension issues. He says drastic changes aren't needed because the PBGC has enough money to cover promised benefits for the next several years.

Labor unions want an immediate government bailout. "At the end of the day, the proper course is to have an infusion of general revenues to cover the airline and steel liabilities that the PBGC is going to be taking over," says Alan Reuther, legislative director of the United Auto Workers. Many airline and steel companies offered generous benefits -- but then had trouble paying them given the stepped-up competition from lower-cost competitors in the U.S. and abroad.

The PBGC, a government-owned insurance company, was created by Congress in 1974 after some high-profile corporate bankruptcies left retirees without pensions. Its mission is to guarantee, up to a point, defined-pension plans -- those that provide workers with a set amount each month based on wages and number of years on the job. If a pension plan shuts down without enough money to meet its obligations, the PBGC guarantees as much as $45,614 annually for employees who retire at age 65.

Last year, the agency posted a deficit of $23.3 billion, double the gap from the year before. It 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 figures include estimated losses from plan terminations by UAL and US Airways. (Of course, these liabilities could fall significantly as interest rates rise and the investments in the PBGC's funds enjoy the same strong returns that have boosted private pension assets over the past two years).

To finance its activities, the PBGC collects premiums -- about $1 billion a year -- from employers with defined-benefit plans; they are required to take part in the program. It also receives funds from pension plans that it takes over and earns returns on its investments.

So far, the agency hasn't had to use any taxpayer funds, but some analysts warn a bailout funded by taxpayers could be on the horizon. Without major changes, such as higher premiums, the agency will run out of cash and rack up a $78 billion deficit in 16 years, according to a new analysis by the Center on Federal Financial Institutions , a Washington think tank.

More than two-thirds of large companies still provide defined- benefit pension plans, though employer groups say that if they are forced to pay higher premiums, companies will be tempted to freeze the plans, or terminate them. According to the PBGC, defined-benefit plans cover 20% of private-sector workers at companies of all sizes -- down from 40% two decades ago.

In the House, pension overhaul is being led by Rep. John Boehner (R., Ohio), chairman of the Committee on Education and the Workforce, who is touting proposals similar to the administration's. In the Senate, Iowa Republican Charles Grassley of the Finance Committee has vowed to tackle the issue as well.

Congress debated but didn't adopt significant overhaul proposals last year. Instead, it passed a temporary rule change that actually eased pension-funding requirements. This year, lawmakers say, will be different. "Our goal is not to tinker around the edges and put off difficult decisions," Mr. Boehner says. "We'll be proposing comprehensive reforms to strengthen worker pensions right now."

Premiums are a sticking point. The basic premium -- $19 per employee per year -- hasn't changed since 1991. To narrow the agency's deficit, the fees would have to be quadrupled, which isn't politically feasible. Instead, the White House may push for a more modest across- the-board increase, as well as higher fees for shakier companies. In the UAL case, the expected termination of a total of four pension plans would likely cost the PBGC an estimated $6.4 billion, but the company has paid only a total of $50 million in premiums.

The PBGC's Mr. Belt also is calling for an end to loopholes that allow companies to report their plans as fully funded when they aren't. Before the US Airways pilots' pension plan was taken over by the PBGC in 2003, the airline claimed it was 94% funded. But the PBGC calculated that it was only 33% funded, with a $2.5 billion shortfall, according to Mr. Belt. US Airways challenged the size of the shortfall in federal court, but the PBGC's calculation was upheld.

The administration also wants companies to be required to tell investors and employees well before any pension plans become significantly underfunded, to give interested people a chance to pressure companies to increase the funding.

On premiums, business groups say they are willing to consider some increase, but warn that much higher fees for troubled companies would be counterproductive by encouraging them to dump pension plans on the PBGC, which has limited power in deciding which pension plans it will take over. And they generally oppose stricter disclosure requirements, saying the volatile nature of valuing pension assets and liabilities could mislead and alarm employees and cause investors to shun company securities.