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?

The costs of retirement security have been borne, at least in the era since World War II, by a combination of employers, especially big firms, and the government through Social Security.

Now the futures of both these retirement pillars are in doubt.

The Bush administration has proposed a pension reform plan that would raise the insurance premiums that companies must pay to the PBGC and tighten the funding rules. Congress is looking at those proposals, but many members worry that making things too tight will drive companies with well-funded plans to end them, depriving the PBGC of their premium payments.

There is also the question of so-called "cash balance" plans, which are hybrids that blend aspects of traditional pension and 401(k) plans. Such plans have been accused of violating federal age discrimination rules -- an issue that is currently up in the air -- and employers say if the matter is not resolved they will terminate those plans, which now account for about 20 percent of PBGC premium revenue.

Most companies do fund their pension plans fairly well, said Julia Coronado, also of Watson Wyatt, and much of the PBGC's problem stems from a few industries, such as airlines and steel, that have undergone fundamental transformations. These have left employers unable to afford the level of benefits they promised in the past.

Pension plans for the largest companies other than airlines are 90 percent funded, she said. "The way they got there was they poured billions of dollars in cash into their pension funds. The picture isn't nearly as bleak as the administration tries to paint it."

James A. Klein, president of the American Benefits Council, a large-employer group, agreed.

The United case, while not unexpected, "does shed new light on the importance of moving forward on pension funding reform," Klein said. But "what Congress and the country need to worry about is not that a handful of very underfunded plans may terminate but that Congress might react to that [with policies that] unintentionally lead thousands more well-funded plans to leave the system."

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