Enron's Pension Approach Draws Scrutiny

February 27, 2002 (PLANSPONSOR.com) - Enron's defined benefit plan might be underfunded by $4 million rather than overfunded by $112 million, according to this morning's Wall Street Journal.

Using 2000 SEC filings, the Journal report estimates that the Enron pension plan might be underfunded by $4 million, rather than overfunded by the $112 million reported in those same filings. The paper also notes that Enron’s plan could be underfunded by hundreds of millions of dollars, if Enron acted improperly, which is unclear at this point.

Offsetting Arrangement?

Enron reportedly took advantage of what is commonly termed a ‘floor-offset’ arrangement for its benefit programs.  These are ‘hybrid’ arrangements where a firm’s defined benefit plan provides a guaranteed ‘floor’ benefit, but that employer obligation is offset by the benefit provided under the defined contribution plan.  In Enron’s case, the defined contribution plan was an employee stock ownership plan (ESOP), and as we all now know, the value of the stock in that ESOP is significantly less than it once was.

Of course, there is nothing illegal about the floor-offset arrangement.  In fact, this is generally viewed as a ‘win-win’ for employees who are somewhat better shielded from the risk of poor investment returns in the defined benefit plan, while enjoying some upside potential from returns in the defined contribution arrangement.  There are, however, those who advocate an entitlement to the benefit from both arrangements, unencumbered by the offset mechanism.

Cutting Back?

However, the Wall Street Journal report notes that the details of the Enron setup may have been illegal, citing staffers in Congress. The Journal’s report notes that the offsets were calculated in an unusual way.  Specifically, that the offset was based on the price of Enron stock from 1996 to 2000, when it was trading between $37.75 and $43.44 – and then used those values to trim the value of pensions that employees had earned between January 1987 and January 1995. 

Likely to come under scrutiny is whether Enron employed some kind of chicanery to effectively cut worker’s benefits when it brought in the offset provision – a move that would be prohibited by the Employee Retirement Income Security Act (ERISA).

PBGC Testimony

Steven Kandarian, the executive director of the Pension Benefit Guaranty Corp. (PBGC) will testify about Enron’s pension plan before the Senate Finance Committee this week (see Familiar Faces, Places in Enron Hearings This Week ).

The Wall Street Journal notes that ‘US taxpayers could be on the hook’ for losses in Enron’s pension plan – but the odds of that occurring seem remote, at least at present. 

Should the Enron plan turn out to be underfunded, the PBGC could have to step in.  The agency has been running a hefty surplus since the late 1990s, though it was not always thus. The PBGC, created by the same legislation that gave birth to today’s pension system, does not draw federal funding.  Rather, it is funded by premiums paid by defined benefit programs.

However, a much greater risk to that system seems likely to come from the burgeoning financial problems of the steel industry and it’s looming pension and retiree healthcare liabilities.  In fact, the top five steel producers account for more than $10 billion in unfunded pension and health care obligations (see  Steel Exec: Consolidation Depends on Government Benefits  and LTV Retiree Health Plan Running Out of Cash, Time ).