Major woes in store for pension plans

With Iraq, Katrina/ Rita, and the U.S. Supreme Court dominating headlines recently, congressional efforts to shore up private pensions have played out below the news radar.

Too often, problems with corporate pension programs have been off the radar of workers caught unawares by underfunding that threatens their benefits. Taxpayers have been even further in the dark, yet they are exposed to liabilities that could dwarf those created in the 1980s by the failures of hundreds of savings and loan institutions.

Last week, the Senate was near completion of its work on its version of a reform bill, the Pension Security and Transparency Act. Final action on the Pension Protection Act, the House version, is also pending.

Defined benefit plans have some 44 million members. Beneficiaries receive, or will receive, monthly checks based on pay, years of service and other factors. But the Pension Benefit Guaranty Corp., the federal agency that insures private pension programs, has been struggling with obligations taken over from failed employers, Kaiser Aluminum Corp. among them, but more notably in the steel and airline industries. Delta and Northwest airlines, which recently filed bankruptcy, have $16.7 billion in unfunded liabilities between them, with the PBGC potentially on the hook for $11.3 billion of that. The remainder, unfortunately, will be absorbed by the employees themselves in the form of lower benefits. Some pilots, for example, have seen annual benefits slashed nearly in half.

The PBGC estimates it was $23.3 billion in the hole at the end of 2004. The Congressional Budget Office says arrears could reach $142 billion in 20 years.

The American Benefits Council, using rosier financial assumptions, says the problem could be less than $5 billion.

But the latest filings with the PBGC show unfunded pension liabilities far exceed those figures. Scarily so. At the end of 2004, the shortfall for plans covering 15 million workers and retirees had reached a total $353.7 billion, up 27 percent from 2003. And that total includes only plans with more than $50 million in unfunded obligations. Unfunded obligations for plans large and small may exceed $500 billion.

Social Security is a pillar of fiscal solidarity by comparison.

Congress has worked for more than two years on potential solutions to the problem. The Bush administration submitted a responsible plan of its own. The fundamental challenge has been finding a balance between reforms that will rebuild underfunded pensions without stripping companies of capital they need to reinvest in their businesses, or discouraging the use of defined-benefit pension plans as part of overall employee compensation.

Since 1985, the number of defined-benefit plans has tumbled from 114,000 to 31,000. Many of those plans have been replaced by defined-contribution plans like 401(k)s, which are not insured by the federal government. The Senate bill, however, includes welcome provisions that would allow employers that offer 401(k)s to provide worker access to professional investment advisers.

One of the bill’s strengths, in fact, is much better disclosure requirements overall. A plan must advise participants of its financial condition, notably what percent of its obligations are funded. The public would have access to much of the information. And reporting requirements to the PBGC itself would be improved. Too often, plan beneficiaries have been blindsided by reports their benefits were in jeopardy. And employers and unions have been too ready to bargain benefit increases when companies were in no condition to fulfill the obligations they had already taken on. The bill would stop that kind of chicanery.

Lump-sum payments to some beneficiaries at the expense of others would also be blocked, or capped, depending on how well companies in bankruptcy have funded their plans. And the disgrace of awarding executives exorbitant retirement packages when employee benefits are at risk would also be stopped.

The sorry state of the airline pension funds, which helped bring the PBGC’s difficulties to the forefront, are only indifferently resolved. The Senate bill allows the industry 14 years to rebuild pension fund reserves, compared with the seven years given other industries. Realistically, 14 years is no kind of deadline at all, but just preserving a pulse in those funds would help delay additional premium increases for companies that have responsibly managed their own pension funds. The Senate bill will jump premiums for all employers to $30 monthly per worker from $19, itself enough of a hit.

At the end of the week, a dispute over whether company credit ratings should affect premiums threatened to snag the bill. But whatever the final version looks like, it will have to be an improvement on the status quo. The question is, will it stave off a costly taxpayer bailout?