Pension Tension

Five years ago, the Pension Benefit Guaranty Corp. enjoyed a $9.7 billion surplus and relative obscurity. But now, in the wake of such high-profile pension failures as the $6.6 billion default by United Airlines in May, the federal agency is running a $23.3 billion deficit, and both the PBGC and its executive director, Bradley Belt, have a higher profile.

    That puts Belt, a former congressional aide and financial services firm executive, in a sort of bully pulpit. And he’s using it to stress that companies were living in a fantasy world in the 1990s, when a strong bull market enabled them to reap profits from their defined-benefit retirement plans. Belt is bluntly telling plan sponsors to face the reality of market downturns, like the one that hit in March 2000 and continues to linger. His key message: Corporations must prepare for such realities by treating pensions as a cost center and keeping them fully funded at all times.

    “Companies have to write checks every year for wages; they have to write checks every year for 401(k) plans; they have to write checks for health care benefits, for paper clips, for notepads,” Belt says. “But somehow we came to accept this notion that we didn’t have to put any money into pension plans–that you could ride these asset gains forever, ignoring that markets are cyclical.”

    In an administration that is business-friendly, Belt is a leading advocate for changes in pension law that corporate constituencies are resisting. The issue is likely to come to a head as legislators return to Washington this month.

    Fall is shaping up as a watershed moment for pension policy reform. Two bills have been introduced–one in the House and one in the Senate–that largely follow the administration’s proposal to strengthen funding rules, institute risk-based premiums, raise PBGC premiums and increase transparency. Belt, a key figure in pension policy along with officials from the Departments of Labor and Treasury, is given some of the credit for helping the White House get its way so far on Capitol Hill.

    After Labor Day, additional committees in the House and Senate are expected to offer their own bills. Key congressional leaders indicate that they want to enact pension legislation by Christmas.

    So far, employers are balking at the proposed changes. A Credit Suisse First Boston report in June found that some large companies would have to sharply increase the amount of money they contribute to their defined-benefit plans if the Bush proposal became law. Administration and congressional proposals include a provision to raise PBGC premiums from $19 to $30 per pension plan participant. IBM, for example, would have had to allocate an additional $1.32 billion this year, and General Motors would have owed an additional $1.5 billion. Smaller businesses would obviously feel the impact too. Businesses argue that the PBGC, with $40 billion in assets, is not in immediate danger of tapping out and that reform proposals would increase the volatility of defined-benefit plans, forcing healthy companies to end them.

    Meanwhile, U.S. Comptroller General David Walker has been urging Congress to fix the PBGC problem before it requires a taxpayer bailout. He draws a parallel to the political lassitude that preceded the savings-and-loan collapse in the 1980s.

    “The common denominator is that there is a systemic problem,” he says. “It needs to be acted on sooner rather than later.”

Agency strained
    The urgency to fix the system stems from the growing number of pension plan defaults in corporate America, which have decimated the PBGC budget. Falling interest rates and stock market declines since the dot-com bubble burst at the beginning of the decade put pressure on company pension plans. Federal rules that permit companies to withhold contributions to their plans also contributed to vast underfunding in the system.

    These factors contributed to spectacular pension defaults. When companies dump their plans, the PBGC must step in and provide payments to current workers and retirees. In 2003, US Airways and Bethlehem Steel dumped pension obligations of $3 billion and $3.7 billion, respectively, on the agency. This year, United Airlines defaulted on $6.6 billion in pension liabilities. A recent study by Watson Wyatt indicates that about 11 percent of big companies froze or terminated their pension plans in 2004, up from 7 percent in 2003.

    The PBGC, an 800-employee agency that had a $9.7 billion surplus as recently as 2000, is now saddled with a $23.3 billion deficit. A total of 3,479 pension plans have been terminated and unloaded on the agency, which is responsible for providing current and future pension benefits for about 1.1 million workers and retirees. The PBGC insures nearly 44 million workers and retirees in more than 30,000 pension plans that collectively have promised about $1.5 trillion in pension payments. The maximum benefit that the PBGC pays is $45,614 annually after a worker reaches 65.

    Signs indicate that the PBGC will have to make more of those payments in the future. The underfunding of insured single-employer pension plans totals $450 billion, while underfunding of plans at firms with junk-bond status, where termination is deemed “reasonably possible,” totaled $96 billion last year, up from $34.1 billion in 2002.

    In a May report, the Government Accountability Office (formerly the General Accounting Office) found that in 2002 almost a quarter of the 100 largest pension plans were less than 90 percent funded. It said that 62.5 percent of plans made no cash contributions, increasing the chances that employees would lose their pension benefits if the companies went under.

Calling for an overhaul
    Belt cites the GAO report, which designated the PBGC as being at “high risk” of significant vulnerabilities, when he argues that the defined-benefit pension system must be overhauled. A former aide to Sen. John McCain, R-Arizona, Belt is given credit for being a straight talker himself. “He’s been thoughtful, analytical and forthright,” says Mark Iwry, a senior adviser to the Retirement Security Project and a former benefits tax counsel in the Treasury Department during the Clinton administration. “He’s been straight up about what he thinks is needed and why.”

    His ability to articulate the technicalities of pension policy has impressed both Democrats and Republicans in Washington. “He truly understands what he’s talking about,” says former Sen. John Breaux, D-Louisiana, who was co-chairman of the National Commission on Retirement Policy at the Center for Strategic and International Studies in 1997 and 1998 when Belt was the commission’s director. “Democrats know he’s someone they can trust.”

    But plan sponsors are particularly resistant to the proposal to increase PBGC premiums from $19 to $30 for each insured participant. “The focus is on the solvency of the insurance system rather than the protection of the defined benefit as a key part of retirement security,” says James Morris, senior vice president of SEI Investments, a management company that provides defined-benefit programs. “The issue for many well-funded plans is that they could be shouldering the burden through increasingly higher premiums.”

    By concentrating on shoring up the PBGC, the administration and Congress are overlooking a fundamental retirement security issue, plan sponsors say–keeping healthy businesses in the defined-benefit system. “What should keep the PBGC and Congress up at night is not that there might be a few more underfunded plans that will terminate, however regrettable that would be, but rather that the premium base that supports the PBGC could further seriously erode,” says James Klein, president of the American Benefits Council. “What’s missing from this debate is what can we do to stanch the flow of plan terminations and freezes, and what can we do to reverse the decline of defined-benefit plans.”

    Belt argues that pension policy must be reformed and that the Bush proposal would help keep companies in the defined-benefit system.

    “We are trying to stop the hemorrhaging,” he says. “And you can’t have a viable defined-benefit system and insurance program if you’re continuing to absorb the kinds of losses we’ve seen at United Airlines, US Airways, Kemper Insurance, Kaiser Aluminum and a host of others that have terminated in just the last year or so.”

    Plan sponsors sometimes take out their frustrations over pension reform on Belt–not on the record but in the corridors of Capitol Hill. “He’s been very effective at laying out problems in the current system,” says a Republican aide on the Senate Finance Committee who requested anonymity because only the official panel spokeswoman and Chairman Charles Grassley can be quoted for attribution. “That has unfairly ruffled some feathers downtown (among business lobbyists). Some lobbyists personalize it. And that’s inappropriate. Being head of the PBGC is one of those thankless jobs. You almost never make everyone happy.”

Critics in the capitol
    On Capitol Hill, pension reform has bipartisan support, as was demonstrated when the Senate Finance Committee unanimously passed its plan in July. But hammering out the details of how to do it can provoke criticism of the administration, Belt’s sales skills notwithstanding.

    “Some of their recommendations were ridiculous,” says Sen. Trent Lott, R-Mississippi. “You can’t drive up the costs at a time when these companies are going down the chute. Just raising what people pay into (the system) is not the solution. It’s how you do it.”

    Belt maintains that the administration has had a constructive dialogue with the Hill on pension reform. “People will differ on how to achieve that,” he says.

    Another Republican, Ohio Rep. John Boehner, chairman of the House Education and Workforce Committee, also has disagreed with parts of the administration’s approach. Boehner’s reform bill, which was approved by his committee in June, is viewed as being more sympathetic toward pension plan sponsors.

    The Boehner legislation permits some interest rate smoothing, a way of valuing assets and liabilities that utilizes the weighted average of interest rates over a number of previous years. Businesses back smoothing because it provides greater predictability. The administration wants to virtually eliminate smoothing, arguing that it distorts economic reality. Boehner’s bill is not as tough as the administration’s proposal on companies whose debt is in the junk-bond category.

    On the Democratic side of the aisle, one member of Congress has singled out Belt for criticism. California Rep. George Miller, ranking member of the House Education and Workforce Committee, claims that Belt didn’t provide information on how much the Bush pension reform would cost companies before the panel acted on the Boehner bill. As a consequence, all 22 Democrats voted “present” rather than approving or rejecting the measure.

    Miller said the Democrats didn’t vote on the bill because they didn’t know its economic impact. “The only conclusion I can draw is that you intentionally withheld your letter until after the markup based on political considerations,” Miller wrote in a July 6 letter to Belt.

    Belt is trying to convince Democrats, Republicans and everyone involved in pension management that the system is in peril. The PBGC insures about 30,000 plans today, compared with 112,000 two decades ago. “It’s difficult to see how a chief financial officer, a chief executive officer can make a rational decision to come into a system where there’s a $23 billion deficit and growing and they’re ostensibly on the hook for paying premiums that cover that,” he says.

    The PBGC is not in immediate danger of collapse, but it is hamstrung by its congressional overseers, says Douglas Elliot, president of the Center on Federal Financial Institutions, which estimates that the PBGC would run out of money by 2022 under current law.

    “The fundamental problem the PBGC has is the imbalance between the level of risk imposed on the PBGC by Congress and the level of premiums the Congress allows PBGC to charge,” he says.

    And in the pinch is the PBGC, which is managing about 360 active bankruptcy cases. “We have large and growing business lines,” Belt says. “Unfortunately, they’re growing for the wrong reasons.”

Workforce Management, September 2005, pp. 36-42 —Subscribe Now!