Government Picks Up Pension Woes as More Company Plans Fail

IN 1992, pension plans insured by the Pension Benefit Guaranty Corporation (PBGC) were underfunded by $50 billion, up from $38 billion in 1991 and $27 billion in 1987.

``While the economy is on an uptick, this is the time to catch up and look forward,'' says Martin Slate, PBGC's executive director. ``The situation is safe now, but there is clearly a long-term problem that has to be addressed.'' Insuring retirees

PBGC insures benefits for 41 million Americans. It is part of an interagency task force suggesting reforms to reduce pension underfunding that have been incorporated in the Clinton administration's proposed Retirement Protection Act.

``Congress has been looking into it for years and has been trying to figure out how dire [the situation] is,'' says Stuart Lewis, counsel to the Washington-based Association for Advanced Life Underwriting. Liabilities such as General Motors' pension plan, which is underfunded by more than $20 billion, are now becoming more ``scary,'' he says.

The threat of a ``pension crisis'' is nothing new, says Dallas Salisbury, president of the Employee Benefits Research Institute in Washington. PBGC reforms were passed in 1987 to alleviate underfunding. But the underfunding continued and the ``crisis'' never happened, he says, creating skepticism on Capitol Hill about PBGC reforms.

Chrysler has reduced its underfunded pension liability by about 75 percent in the last five years, he adds, disproving the urgency of the situation in the eyes of some.

The PBGC is currently running a $2.7 billion deficit, Mr. Slate says, the result of claims that have outstripped premium revenue. The problem is concentrated mainly in the airline, steel, auto, and tire industries. The PBGC projects that it could become burdened with another $45 billion in underfunded plans.

But recent growth of underfunding can largely be attributed to today's low interest rates, experts say. If interest rates go up, underfunding will decrease, Mr. Salisbury says.

The real issue may be about ``the philosophy that the only good defined-benefit plan is a fully-funded plan,'' Salisbury says. The fact that civil service and defense agency pension plans are nearly $1.5 trillion underfunded makes it difficult for PBGC to convince some in Congress that private pension plans should be fully funded, he adds.

One of the more controversial aspects of the reforms is the uncapping of premiums paid by companies with underfunded pensions. This move, Slate says, would be an incentive to fully fund plans. Some companies' premiums could double or triple, Mr. Lewis says.

Critics worry that the higher premiums will exacerbate a company's financial woes. On the other hand, why not charge higher risk companies higher premiums? Lewis asks. Penalizing weak firms

``Companies with 80 percent of the underfunding will be paying about half of the premiums,'' Slate says.

PBGC proposals are also designed to tighten the latitude given to employers maintaining underfunded plans.

``Fully within the law, many employers have been able to make little or no pension contributions - to take contributions holidays - even though their plans are severely underfunded,'' Slate says. ``The law is flexible.... Our bill would take that wiggle room out when they're underfunded.''

One measure would prescribe the actuarial assumptions employers may use when calculating the contributions to be made to underfunded plans. The reforms will not apply to fully funded plans.

Regulating pensions

Companies could no longer estimate shorter life spans for their workers, or use an unrealistically high interest rate to calculate pension fund capacity.

But the ``loss of flexibility'' in making corporate decisions worries some companies, Lewis says. Underfunding is often a considered decision, Salisbury says. Fully funding a pension plan is ``sometimes not the best use of corporate assets.''

If an employer cannot meet pension obligations, PBGC pays retirees a maximum of $29,250 a year, sometimes not the full amount promised by the employer. About 75 percent of the plans it insures are fully funded, Slate says.

Despite some controversy about the reforms, ``the general consensus is that something should be done,'' Lewis says. ``Congress has not shown great enthusiasm over PBGC [proposals] in the past.'' But the inaccurate comparison between the savings and loan crisis and a possible pension plan catastrophe ``has possibly made this a higher priority.''