The deficit reduction package that is awaiting a Senate vote contains provisions that would cut the cost of insuring private pension plans by an estimated $30 million a year and raise benefits for retirees. A similar measure is pending in the House.
The legislation would prohibit still-solvent companies from unloading their pension liabilities on the Pension Benefit Guaranty Corp., the employer-funded agency that guarantees a minimum level of benefits for retirees whose defined benefit plans have been terminated by their companies. PBGC would only assume the obligations of an employer that is in bankruptcy, or could be expected to go out of business if it continues to fund its pension plan.
If a company files for reorganization under the provisions of federal bankruptcy laws and then survives, it would have to plow back part of its profits to meet its pension debts.
Sen. Howard Metzenbaum (D-Ohio), the author of an amendment limiting pension reversions, said its passage would mean that "for the first time, our pension laws will require financially healthy companies to pay all promised pension benefits before shutting down a pension plan." The changes in the law would only apply to single-employer pension plans.
Since PBGC was established a little more than a decade ago, it has become the trustee for more than 1,000 terminated plans. Because many of these were underfunded -- with too few assets to pay the guaranteed benefits when they ended -- PBGC now has a deficit of $462 million.
That deficit is expected to double when PBGC takes over the plan of Wheeling-Pittsburgh Steel Corp., which filed for reorganization in bankruptcy in April.
PBGC has been pressing for the legislation, which would represent a major change in pension law, for at least four years. Current law permits PBGC to recover its costs by claiming up to 30 percent of the net worth of a company that has terminated an underfunded plan.
However, for companies with little net worth, this often acts as an incentive to them to shut down their pension programs and leave the bill for it to the agency -- and by extension, to all employers who contribute to the insurance fund.
Wheeling-Pittsburgh's liability of $475 million is the largest to date. Four of the largest claims handled by PBGC in the past were also from steel companies. And, if PBGC should decide on an involuntary termination of LTV Steel Corp.'s plan -- a move being considered -- the liability would top $800 million.
The pending legislation would permit companies to terminate underfunded plans only if the companies are "distressed." They must be either in the process of liquidation or reorganization under federal bankruptcy laws, or must present PBGC with substantial evidence to show they would be forced to go out of business.
The House version would add two more definitions of distress: having received multiple funding waivers, and declining numbers of working employes supporting the pension plan.
Under current law, employers can get up to five waivers of their contributions to PBGC in 15 years from the Internal Revenue Service. (In September, LTV asked the IRS for permission to withhold payment of the $182 million it currently owes its pension fund.) It often happens that after receiving several waivers, companies fold their plans, leaving them underfunded.
It is not clear whether, or how, the legislation would affect either Wheeling-Pittsburgh or LTV.
Over the objections of many business representatives, the legislation would impose an additional penalty to the 30 percent of net worth PBGC can already claim. It would require companies that qualify as distressed, but that continue in business, pay PBGC 10 percent of their profits for up to 10 years after they again start operating in the black. The companies also would have to pass on 5 percent of profits to beneficiaries to make up the difference between the amount guaranteed by PBGC and the amount promised by contract.
For example, if a company contracted to pay pensioners $2,000 a month, but there was only enough in the fund when the plan was terminated to pay them $1,400, then PBGC would step in to pay beneficiaries up to its allowed maximum of some $1,600. PBGC would then go after the company's profits to make up the $200 the board would be owed, while the company would also put some profits toward making up the difference between what the pensioner got and the $2,000 the pensioner was promised.
Another provision would make it more difficult for companies to terminate their plans to recoup surplus pension assets, by allowing participants to plead their cause against termination with the PBGC. In the past five years, companies have recouped $8 billion through such reversions.