U.S. Pension Insurer Could Require Aid as Deficits Surge
Thursday, May 21, 2009
The federal agency that guarantees corporate pensions was $33.5 billion in the red at the end of March, triple its deficit six months earlier, the agency's head told a Senate committee yesterday.
The recession threatens to add to the strain on the Pension Benefit Guaranty Corp. by pushing more companies into bankruptcy and leaving the struggling agency responsible for their pensions. For example, the agency faces a potential tidal wave of claims from Chrysler and General Motors, whose pension plans are underfunded by an estimated $29 billion, the Government Accountability Office said.
If the PBGC's condition continues to deteriorate, the government could come under pressure to shore it up with taxpayer funds, the GAO said in testimony to the Senate's Special Committee on Aging.
"The committee has grave concerns about the agency's viability," said the panel's chairman, Herb Kohl (D-Wis.).
Despite the deficit, the PBGC will be able to meet its obligations to pensioners for many years, the agency's acting director, Vincent K. Snowbarger, told the panel. That's because the payments it owes are not due all at once; they are spread over the beneficiaries' lifetimes, Snowbarger explained.
Finances aside, the GAO is concerned that the PBGC could have trouble simply handling the added work. The agency suffers from weaknesses in its management and governance, the GAO's Barbara D. Bovbjerg, who oversees workforce and income security issues, said in a statement to the committee.
A report last week by the agency's inspector general alleged that Charles E.F. Millard, during his tenure as a PBGC director, had improper contacts with big Wall Street firms while they were bidding on contracts to help manage PBGC investments. Millard allegedly asked an executive at the financial firm BlackRock how to tailor a contract requirement to winnow the field of bidders. In addition, he allegedly received help with a job search from an executive at another bidder, Goldman Sachs.
Kohl and the agency's acting director recommended that the contracts, worth a total of $100 million, be canceled.
Millard, who served under President George W. Bush, declined to answer questions at yesterday's hearing, invoking his Fifth Amendment right not to give testimony that might incriminate himself.
Millard previously asserted that he complied with all legal and ethical obligations. "I acted in what I believed to be the best interests of the PBGC to implement desperately needed reforms of PBGC investment policy," Millard said in a letter to the inspector general.
Millard dismissed speculation that he was trying to advance his prospects of landing a post-government job at a large financial services firm. "This was ridiculous, as I already had numerous contacts at such firms and had worked in senior roles at two of them in the past," he wrote.
The PBGC is overseen by a three-member board, but the members have not met face-to-face since February 2008, according to the GAO. The board includes the secretaries of the Commerce, Labor and Treasury departments, who have many other demands on their time.
The PBGC takes over the pension assets and obligations of companies that are no longer able to bear the burden themselves. Like the Federal Deposit Insurance Corp., which insures bank deposits, the PBGC funds itself by collecting insurance premiums from the companies it backstops.
Workers and retirees whose pension plans are taken over by the PBGC can face a reduction in their pensions, because there are limits to the benefits the agency guarantees. For plans that fall into the PBGC's hands this year, the maximum guaranteed benefit is $54,000 per year for payouts beginning at age 65, Snowbarger told the Senate panel.
If the PBGC inherits the Chrysler and GM pension plans, autoworkers could face a major loss of retirement income. For the auto sector as a whole, pensions are underfunded by an estimated $77 billion, of which the guaranteed benefits total only $42 billion, Snowbarger said in written testimony.
To avoid such a blow to retirees, and to avoid unsustainable increases in the premiums the PBGC charges corporations, the government could be called upon to support the agency, the GAO's Bovbjerg wrote.
The tripling of the PBGC's deficit from $11 billion as of Sept. 30 to about $33.5 billion as of March 30 was mainly the result of a decline in interest rates and an increase in the number of pension plans the agency must manage. Declining interest rates imply that the agency's investments will grow more slowly. The deficit is an estimate of the gap between the agency's assets and what it would need to cover its obligations stretching into the future.
Another potential source of trouble for the PBGC is legislation passed in December granting corporations relief from the economic crisis. The legislation allowed some companies to make smaller contributions to their pension funds, thus leaving the plans more underfunded, according to the GAO.