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By Staff Report
Jun. 20, 2006
Abandoning defined-benefit plans for defined-contribution plans will economically hurt U.S. companies in the long run, says the former chief of the PBGC.
Bradley Belt, in an interview with Pensions & Investments on his last day as executive director of the Pension Benefit Guaranty Corp. in Washington, D.C., said one of his chief concerns is that corporations will use pending pension reform and potential changes to the Financial Accounting Standard Board’s Rule 87 as excuses to switch to defined-contribution plans.
“I’m concerned that companies are being very shortsighted if they are putting all their eggs in the DC basket” and less in defined-benefit plans, Belt said in an interview on May 31, his last day after three years at the PBGC. “You’ll have a situation in which employees of those companies won’t save adequately and won’t participate in their companies’ match programs. Down the road, those companies will have a lot of 65-year-olds who don’t have adequate savings for retirement, and therefore are not going to be able or willing to leave the workforce. This would happen just as a company might want to manage those individuals out and bring in younger, lower-cost workers.”
Belt also underscored the importance of a defined-benefit plan to attract talent.
“Each company needs to determine what the optimal compensation structure should be,” Belt said. “They want to be able to recruit the most talented employees. Historically, DB plans have been a very effective compensation tool and, more importantly, one that could be used to manage the exit of older workers at appropriate times.”
The final version of the pension reform bill, which has been debated by members of Congress since February, could prompt many U.S. corporations with defined-benefit plans to switch to a defined-contribution model. That’s because the bill is expected to implement stricter funding rules, change the way corporations can calculate the discount rate used to calculate their liabilities, and decrease the number of years companies have to fund their pension plans.
Additionally, a proposed change to FASB 87 that would eliminate actuarial smoothing could make the value of pension assets of a corporation more volatile in conjunction with their liabilities.
On June 1, Labor Secretary Elaine Chao appointed Vincent K. Snowbarger, the PBGC’s deputy executive director, as its interim executive director.
Belt suggested his permanent successor “develop a thick skin and wear a hard hat.”
“He or she is taking actions and making decisions that will protect the greater set of core interests, but inevitably will adversely impact other parties,” he said.
Belt presided over the agency’s first flat-rate premium hike, which became effective January 1. It was not well-received.
“There was an understandable reluctance of having to pay higher premiums by U.S. corporations, but the fact of the matter is the premiums had not been raised since 1991,” Belt said. “And that hike brought in a little over $60 million in additional revenues to the PBGC each year. Our loss in the (UAL Corp.) bankruptcy was almost $7 billion, which is about 10 years’ worth of flat-rate premiums in one fell swoop, so the premiums were clearly inadequate to cover expected future claims.”
Belt said he was proud that he helped guide the agency through one of its more difficult periods, which included the high-profile bankruptcies of Houston-based Enron Corp. and UAL Corp. of Elk Grove Township, Illinois, as well as 120 distressed terminations of corporate pension plans in 2005 alone.
“We used the relatively limited set of regulatory tools and authorities at our disposal to achieve some positive outcomes for stakeholders,” he said. “Most notably, in the Enron bankruptcy we were able to be proactive and avoided taking any loss for the insurance program or any cutbacks in the benefits for participants. United Airlines, unfortunately, terminated its pension plan. But as a result of being proactive in the settlement agreements we entered into, our recovery rate was substantially in excess of what is typically the case for the PBGC.”
United Airlines’ $15.2 billion defined-benefit pension plan was underfunded by $10 billion when the company declared Chapter 11 bankruptcy in 2003. It is estimated that the PBGC assumed about $7 billion in liabilities when it took over the plan in 2004.
In the future, the PBGC must create a plan to deal with risks of a downward credit cycle or recession, Belt said.
“My concern is that the PBGC has had record growth in its deficit and a record number of terminations in a very strong economic environment (2004 to 2005). That raises the question of what are the risks to the insurance program in a less benign economic environment,” he said. “If you have a change in the credit cycle or a recession, there is the potential for additional losses, and we haven’t done anything to address those risks.”
For House and Senate conferees negotiating a compromise on pension reform, the greatest challenge is creating rules that would force corporations to disclose the actual funding levels of their pension plans.
“The real tragedy is that when companies terminate their pension plans, there are real-world impacts. When a plan gets terminated, there are workers and retirees who have their expectations of retirement security dashed,” Belt said. “You also have companies that have acted more prudently in terms of managing their pension plans that may be on the hook to pay higher premiums as a result of the pension plan terminations, and ultimately, if premiums are not the answer, then taxpayers would be called upon to rescue the insurance program.
“The solution is that there needs to be more rational and stronger funding rules and greater transparency,” he said. “The bottom line is that you wouldn’t have a need for high premiums if pension plan losses are minimal. We wouldn’t be having this conversation if United’s pension plan were underfunded by $10 million instead of $10 billion, or if Bethlehem Steel’s pension plan were underfunded by $4 million instead of $4 billion.”
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