PBGC Head Paints Gloomy Picture for 2003 – and Beyond

>That was the sobering report Wednesday from Steven Kandarian, executive director of the Pension Benefit Guaranty Corp. (PBGC) to the Subcommittee on Select Revenue Measures of the US House of Representatives Ways and Means Committee.

>Kandarian testified that the agency’s deficit has ballooned to an estimated $5.4 billion as of March 31, 2003 from $3.6 billion in FY 2002  (See  PBGC Reports Record Loss ,  PBGC Bottom Line Buffeted by “Perfect Storm” ). At the same time, Kandarian said that the aggregate underfunding in the single-employer defined benefit system is now more than $300 billion – the highest ever – and a figure the PBGC executive labeled “staggering.”

>Things could get worse before they get better. Kandarian testified that $35 billion in vested underfunded claims is “still looming” in pension plans sponsored by financially weak companies, which could eventually become the PBGC’s responsibility and that the fiscal year 2003 figure is likely to be “much higher.”

Large Underfunded Plans

>As he has in the past, Kandarian blamed the deficit on the failure of highly underfunding plans at a number of large companies including a series of steelmakers (See  Steel, Airlines Weigh on PBGC ). He told the lawmakers that because PBGC has now absorbed most of the steel plans, the airline and automotive sectors represent the agency’s biggest current exposure. The airline industry now has $26 billion of total pension underfunding. In the automotive sector – comprised of auto, auto parts, and tire and rubber companies – total pension underfunding exceeds $60 billion, he said.

>The PBGC executive mentioned large plans in the agency’s fold: Trans World Airlines; retailers Bradlees, Caldor, Grand Union, and Payless Cashways; steelmakers including LTV, Acme, Empire, Geneva, and RTI; other manufacturers such as Singer, Polaroid, Harvard Industries, and Durango.

>In December 2002, the agency had to take over plans at Bethlehem and National Steel with combined underfunding of more than $5 billion (See  Judge Green Lights Bethlehem-ISG Deal  ), while the US Airways’ pilots pension plan terminated with $2 billion in underfunding, Kandarian testified.

>Kandarian testified that 2002 pension claims bested the total claims for all previous years since 1974 combined. He said it would take 12 years of company-paid insurance premiums to cover 2002 claims. The agency gets its funds from its pension insurance program and from investment income.

A Moral Hazard

“The existence of the pension insurance program creates moral hazard, tempting management and labor at financially troubled companies to make pension promises the companies later find they are unable to keep,” Kandarian testified. “These unfunded promises increase the cost that chronically underfunded pension plans at weak companies impose on the defined benefit system. Over time, this leads to higher premiums for all plan sponsors. Financially strong companies at some point will have had enough, and will exit the defined benefit system, leaving only those which pose the greatest risk of claims. We need to make sure that the incentives in the system are changed so this doesn’t happen.”

>Specifically, Kandarian called for:

• a permanent replacement for the 30-year Treasury rate used in helping to determine a plan’s liabilities
• a strengthening of plan funding rules. He said current laws allow employers to up pension benefits as long the plan is at least 60% funded. “The funding rules should encourage companies to make regular contributions to reach an appropriate funding target,” Kandarian testified. “Making defined benefit plans better funded is important to providing retirement security to American workers.”
• better plan disclosure rules to more accurately reflect a plan’s fiscal condition
• possible increases in PBGC’s pension insurance premiums.

>Kandarian also warned lawmakers not to give in to those who have pointed out that PBGC “is in no danger of running out cash” as an argument that pension underfunding is not a critical problem.

>The speech is at http://www.pbgc.gov/news/speeches/testimony_043003.htm.