US pension-insurance agency awash in steel-industry red ink
America's safety net for pensions is fraying badly. Years of neglect have weakened it. Huge bankruptcies threaten to rip it apart. The problem is that the federal agency set up to insure a big share of pension plans - the Pension Benefit Guaranty Corporation (PBGC) - is going broke.
While the red ink at an obscure government agency might seem inconsequential, a growing number of government officials and interest groups is paying attention because the agency's potential effect on troubled industries is huge.
``There is a growing sense of urgency,'' says Dennis M. Kass, assistant secretary of labor for pension and welfare benefit programs. ``PBGC's problems are of such a magnitude that over time there will be a need for fairly sweeping changes in the way the pension system operates.'' The administration is looking at the issue of pension overfunding as well as the agency's problems, he adds.
The biggest problems of the PBGC, which insures 112,000 pensions covering 38 million workers, result from the underfunded pensions in the steel industry. Last year, for example, the bankrupt Wheeling-Pittsburgh Steel Company terminated its deficit-ridden pension plans after four years of putting in little or no money. The move dumped a huge $498 million liability onto the shoulders of the PBGC. More important, according to some angry steel executives, it slashed the company's labor costs by $3 an hour while its competitors bear the burden of keeping the PBGC solvent.
``It's clearly a matter of concern,'' says David Hawley, federal public affairs director at Inland Steel Industries. ``It's a competitive threat.''
One of four huge underfunded plans at the LTV Corporation has also been taken over by the PBGC. Observers expect other troubled companies to follow suit.
``I've described a pension plan as becoming a corporate cookie jar for troubled companies,'' says Kathleen Utgoff, executive director of the PBGC. ``There are incentives under the law ... when you get into trouble not to fund your pension plan.''
The agency already has a record $2.4 billion deficit and a negative cash flow. If, as expected, the rest of LTV's pensions become PBGC's responsibility, its deficit will double, Dr. Utgoff notes.
``It's hard to predict exactly when we'll run out of money,'' she says. ``We may have 10 years, but if we wait 10 years to take care of the problem, then the fix is going to be much more difficult.''
There seems to be wide agreement among various interest groups that the minimum funding standards for PBGC pensions need to be tightened. Despite the current guidelines, the funds of the terminated LTV plan were allowed to fall to $7,700 before the PBGC stepped in to assume payment of its $2 million monthly payroll; the Allis-Chalmers Corporation had only one month's benefits left when it terminated its pension program.
``Everyone wants to look thoroughly at the minimum funding rules,'' says a legislative assistant at the House Labor-Management Relations subcommittee. But solutions are complex. ``You look at one thing and it raises 500 other problems.''
The Department of Labor has reached a consensus on some recommendations, according to a well-placed source. It wants to force companies to beef up pension funding when early-retirement plans are in effect and to fund pension plans on the assumption that plant closings are more than just a slim possibility.
Reform remains elusive, however, because various interest groups are still groping for a way to ensure the agency's long-term soundness while causing as few short-term disruptions as possible. For example, many healthy companies like the idea of risk-related premiums, where PBGC would charge underfunded pension programs higher premiums than overfunded plans, just as other insurance firms do. But too much financial strain on the weaker companies could force them out of business.
Several large unions are also in a quandary. ``It's not an easy decision for them,'' says Larry Smedley of the AFL-CIO. ``They're trying to protect the pension benefits of their members and [yet] they don't want to put undue burden on their employers.''
Mr. Smedley wants higher premiums for all PBGC employers, but premiums have already tripled this year. Companies warn that further dramatic increases could cause many to switch to benefit plans not covered by the agency.
``I don't think the basic [debate] has been clarified yet,'' says David Blecher, a partner with Hewitt Associates, an employee-benefit consulting firm based in Chicago. ``We're at the state at which a lot of analysis needs to be done.''
Utgoff adds: ``People really ought to agree on the costs of the current system and how to reduce them. ... What we want to do is focus on the underfunding.''