Private pension funds solidly in the black

The social security system is awash in red ink, but the private pension system is very much in the black. Buoyed by rising stock and bond prices, as well as increased employer contributions, private pension assets swelled last year. According to the latest statistics from Pensions & Investment Age, a trade publication, the top 1,000 private pension funds increased their assets in 1982 by a fat 20 percent, to $ 622 billion.

''This should be good news to the average worker in a private corporation or in a state or local government,'' says Michael Clowes, editor of Pensions & Investment Age, ''because it means that the assets securing his pension have continued to grow at a healthy rate despite the recession.''

That will be good news for even more workers. According to Towers, Perrin, Forster & Crosby, an employee benefits consulting firm, in 1979 some 68 percent of the ''relevant'' work force was participating in a private pension plan. By 1995, Towers, Perrin estimates, 80 percent of the work force could be participating. (The ''relevant'' work force is defined by the Employee Benefit Research Institute as civilian, nonagricultural workers aged 25 to 64 with one year's service, employed more than 1,000 hours a year.)

Currently, employer contributions exceed benefit payouts by 30 percent. According to Pensions & Investment, 16 percent of the funds' asset growth last year came from contributions.

Even though the assets have grown, Hayworth Robinson, managing director of William M. Mercer, employee benefits consultants, says the main reason the private system is in better shape than the public system is that ''it is not making open-ended promises.'' For example, most private pension plans don't index their benefits to inflation. Rather, the benefits are fixed.

Social security, on the other hand, does index benefits to inflation. Thus Mr. Robinson, former head of the Social Security Administration, notes that employees receiving private pensions are themselves put ''in worse financial shape,'' even though the funds are healthier. The private funds must set aside their benefits in advance, while the social security system is a pay-as-you-go type of affair. Unfortunately for the social security system, benefits are outstripping contributions.

Experts point out still other reasons that the private funds are doing better than social security:

* Most private plans invest in long-term bonds, the stock market, and real estate, which historically provide them with better returns than funds invested by the social security system obtain. It invests only in long-term government securities. According to Pensions & Investment, the top 200 funds, as of the year ending Sept. 30, had invested 39 percent of their assets in long-term bonds which returned 30.5 percent. The 37 percent of their funds invested in stocks returned 11.8 percent, while the cash portion - invested in 90-day Treasury bills - returned 11.5 percent.

In addition, there is considerable competition among fund managers to manage the pension assets. A. Norman Crowder III, a vice-president and director of Towers, Perrin in Boston, says, ''My clients are striving for performance and they hire or fire fund managers for performance. My clients may cut the worst performer.''

By way of contrast, the Treasury invests excess social security funds in ''special'' long-term government securities, yielding less than long-term Treasury bonds. According to a US Chamber of Commerce study made last year, in 17 of the previous 21 fiscal years the current rate on all Treasury securities exceeded the average yield earned by the social security trust funds. The chamber estimated this had cost the system $15 billion.

* The vesting benefits for the private systems have been tougher. ''The private system has been slow to embrace the concept of rapid vesting,'' notes Andrew J. Lawlor, a partner in the actuarial, benefits, and compensation division of Coopers & Lybrand, an accounting firm.

''When a work force is more mobile than it has been in the past,'' Mr. Lawlor adds, ''using long vesting periods diminishes the benefits to the employee.'' When an employee ''vests'' it means he is eligible for the minimum pension benefit provided by a public or private plan at time of retirement. Once an individual leaves the company he works for, he keeps that vested interest but cannot transport the pension plan to his next employer. Contributions to social security are transportable, however.

Mr. Clowes of Pensions & Investment notes that this element of nontransportability saves pensions a lot of money. For example, if an individual works for 10 years for one company - and becomes vested - and then goes to another company, his retirement benefits will be paid at the minimum rate. Most private pensions are figured on the basis of the last years of service.

This is not to say there aren't problems with some of the private pension funds. For example, some of the large labor-intensive companies, such as International Harvester, have significant unfunded liabilities.

If Harvester, for example, were to go into bankruptcy, it would dump $1 billion of unfunded liabilities into the Pension Benefit Guarantee Corporation, a quasi-government company. The PBGC, however, doesn't have the funds right now , since it is running an actuarial deficit of $250 million. It has asked Congress to allow it to increase its insurance premium from $2.50 per employee to $6 per employee covered. Congress, however, has yet to grant the increase.

''Clearly the PBGC doesn't have the money,'' Mr. Clowes says, ''and the rates are going to have to rise.''

Most private pensions are sufficiently funded, however. A Towers, Perrin study found that 90 percent of all private plans were adequately funded. If the other 10 percent were to go into bankruptcy, dumping their plans on the PBGC, it would amount to only a $7 billion liability.

Compared with the red ink in social security, the number is not large.

''While it's possible some employees might lose some money,'' comments Mr. Robinson of Mercer, he adds, ''They should worry about the whole dog. They don't just lose pensions, they lose jobs as well.''

But Robinson doubts employees would ultimately lose their pensions, even if the companies went into bankruptcy and the PBGC did not have funds. ''The taxpayer would ultimately bail them out,'' he concludes. Top 15 private pension funds Fund Assets (Billions of dollars) AT&T 45.60 New York State Common 16.97 New York City Systems 15.95 General Motors Corporation 15.80 California Public 13.51 New York State Teachers 9.97 General Electric Company 9.37 Texas Techers System 7.31 California State Teachers 7.30 IBM 6.99 Ford Motor Company 6.61 Michigan State Employees 6.34 Ohio Public Employees 6.29 Wisconsin Board 6.18 Ohio Teachers 6.18 Total $180.37 Source: Pensions & Investment Age.