New Strains On Safety Net For Pensions

By Albert B. Crenshaw
Washington Post Staff Writer
Thursday, May 12, 2005

A bankruptcy court's approval Tuesday of a deal between the government's pension insurance agency and United Airlines marks the latest, and perhaps most spectacular, in a series of changes that are restructuring the relationship between American workers and large employers.

It also places severe new strains on the social safety net that has underpinned traditional private pensions since enactment of the Employee Retirement Income Security Act (ERISA) in 1974.

Under terms of the deal, many United workers, particularly pilots, will get far lower pensions than those promised by the airline years ago. At the same time, the government insurer, the Pension Benefit Guaranty Corp. (PBGC), formally takes on four pension plans that are underfunded by billions of dollars.

The United plans, which together cover more than 120,000 workers, retirees and dependents, have assets that are $9.8 billion short of what is needed to pay the full promised benefits. But because the PBGC's annual guarantee is $45,613.68 for workers retiring at age 65, those who have been promised more could see their pensions reduced. Taking that into account, the PBGC figures it is taking on about $6.6 billion of the underfunding.

Under the deal, the PBGC may recover additional money from United. As part of the agreement the agency will get $500 million in notes from United, another $500 million in notes convertible into United stock after the carrier emerges from bankruptcy, and $500 million payable if the company meets certain financial targets.

Agency officials said they agreed to the unusual terms in hopes of easing the impact of the takeover of the plans.

But the PBGC is also increasingly nervous about the fate of the remaining "legacy" carriers that still have pension plans. If they cannot compete with United and other carriers that do not have large pension costs, they, too, may file for bankruptcy and shift their pensions onto the agency.

The PBGC has been hit with a series of blows in recent years that have reduced its own funding status from a surplus of $9.7 billion in 1999 to a deficit of $23.3 billion last fall. The PBGC's deficit, which already included United's costs, anticipated by the agency, consists of the present value of its liabilities minus its assets.

Because the PBGC does not pay lump sums to pensioners, its assets at this point are sufficient to pay its obligations for some years, though the insurer declines to say exactly how many.

However, a model by the Center on Federal Financial Institutions, a group that studies government insurance and lending, predicted last fall that the agency would run out of cash about 2020.

The question of what to do now confronts policymakers and employers in stark terms.

"We are at a real inflection point when it comes to figuring out what retirement security is going to look like" in the future, said Kevin Wagner of benefits consultants Watson Wyatt Worldwide. And, he said, a key question is, who will bear the risk of saving for retirement?

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