Promise of U.S. Pension Agency Dims
Battered by financial troubles, Wheeling-Pittsburgh Steel Corp. moved last year to close out seven pension programs in a desperate attempt to cut costs. But its workers and retirees faced no crisis, even though the pensions were vital to their survival.
The reason: an obscure federal agency named the Pension Benefit Guaranty Corp., which was created to safeguard such benefits for the 38 million workers covered by private pension plans. Last month, PBGC agreed to pick up Wheeling-Pittsburgh’s retirement commitments, a rescue that could cost $475 million.
Although the Wheeling-Pittsburgh bail-out was extraordinarily large, it was just one of many in recent years. In 1985 alone, PBGC mailed its buff-colored checks to more than 77,000 former workers whose companies have, for various reasons, abandoned their pension programs.
“Without the basic guarantees of the PBGC, the Wheeling-Pittsburgh workers would be very uncertain as to their future,” said Jack Sheehan, legislative director of the United Steelworkers of America. “Who knows what the future holds for that company?”
Despite such accolades, the unusual government corporation today has an identity crisis, its fundamental mission under question. In keeping with Reagan Administration philosophy, its executive director, Kathleen P. Utgoff, wants to turn over much of its work to the private sector.
To complicate matters, PBGC faces a troublesome financial outlook. Its long-range obligations make for a $1.5-billion deficit, a price tag that could increase markedly if more companies in declining industries retreat from their retirement promises.
The money problems alone are likely to force changes in PBGC as officials now predict it will be unable to meet commitments by “early in the next century.” And the way its role evolves will affect the nature of benefits that employers are willing to promise future retirees and, possibly, the willingness of some companies to maintain any pension program at all.
“Any agency should look at what it is doing, how it is done and who should be doing it,” Utgoff, a personable 38-year-old economist and UCLA graduate, declared. “Right now the PBGC is running a subsidy program for firms that are in trouble.”
Congress created PBGC in 1974 as one of many new measures to protect retirement benefits. Until then, retirees and long-term employees faced a potentially grievous situation if their company went belly-up.
In the bankruptcy of the Studebaker auto company, for example, more than 4,000 workers lost all or part of their pensions. A 1972 federal analysis concluded that nearly half the workers whose pension plans were canceled lost half or more of their benefit.
“We created PBGC to make sure nobody got hurt if their plan went down the tubes,” recalled Michael S. Gordon, a Washington attorney who helped write the 1974 law known as the Employee Retirement Income Security Act (ERISA). “We enacted the most comprehensive, ambitious, grandiose pension protection program that any country has every done--and by and large it has worked.”
Limit on Benefits
Unlike most of the government, PBGC, which occupies five floors of a downtown Washington office building, works without tax revenue. Rather, it runs on fees charged to pension plans, as well as assets recovered from those it takes over.
Even though PBGC’s obligations are potentially staggering, they are limited. The corporation does not guarantee all pension benefits.
It protects traditional private-sector pension programs, in which workers are promised a designated benefit, usually based on years of service, wages and retirement age.
It does not safeguard medical benefits, 401(k) plans, individual retirement accounts or other programs that stress personal savings.
Nor does PBGC always replace 100% of a pension. It imposes a cap on monthly benefits it will pay, currently set at $1,790. Other restrictions affect the amount of benefits PBGC will pick up if a company instituted them in the last five years.
Yet the restrictions have not stopped costs from skyrocketing in recent years. Utgoff contends that companies have cynically unloaded--"dumped"--poorly financed pension programs on the federal corporation.
“ERISA was there to make sure people got their pension promises,” she said in an interview. “But it has created an incentive for employers not to put money in their pension plans.”
She did not specifically name Wheeling-Pittsburgh, but a steelworkers union official said: “Wheeling-Pittsburgh was on the brink of liquidation. The employees of such a distressed company were exactly the kind of people the PBGC was meant to protect.”
Federal law gives companies as long as 30 years under certain circumstances to build up the pension reserves necessary to completely cover their long-range commitments.
Cut Back Financing
In addition, the Internal Revenue Service grants troubled firms special waivers from the required pension contributions, a situation that can increase the liability PBGC ultimately will inherit.
Utgoff estimates that 5% of company plans have serious financing problems, with the remaining 95% in sound condition.
But the 5% have a major impact. Consider the case of Allis-Chalmers Corp., a Milwaukee heavy-equipment manufacturer badly bruised by the slump in capital goods markets in recent years.
The IRS periodically granted Allis-Chalmers special permission to cut back on financing its pension program. By the time the manufacturer sought a PBGC bail-out in 1985, David M. Walker, PBGC’s acting director at the time, estimated that the plan could pay only three cents for each dollar of benefits promised.
Recently, PBGC announced that it would pick up the cost of benefits for Allis-Chalmers’ 21,500 present and future retirees--at a price tag of $165 million.
Concerned about the Allis-Chalmers and Wheeling-Pittsburgh situations, Congress this year more than tripled PBGC’s annual charge to employers, to $8.50 for each worker covered by a pension plan.
It restricted the right of companies to dump pension obligations on PBGC, unless they face bankruptcy. And it required the IRS to inform PBGC of its intention to give a company a break from its pension financing requirements if more than $2 million is involved.
Nonetheless, PBGC officials estimate that costs are galloping past revenues at the rate of $100 million a year. They now say it would take a premium of $13.50 per worker to finance the long-range deficit.
“The problem hasn’t been solved,” Utgoff said. “We’ve got a large and growing deficit.”
PBGC’s financial position is further weakened by its lowly status in bankruptcy proceedings as a general unsecured creditor for most of its claims.
Although Congress has increased the amount of a company’s assets that PBGC can claim, the corporation nonetheless is sent to the back of the line when it attempts to recover most of them.
More basically, Utgoff seeks to revolutionize the way companies pay for PBGC’s protections. Employers now are all charged the same $8.50-per-participant rate, even though some plans are at virtually no risk of faltering, while others struggle by at a bare-bones level.
Thus, the well-managed, strongly financed plans help pay for the protection of their weaker counterparts, even shouldering the cost of liabilities turned over to PBGC when everybody’s premiums are hiked.
“Why should well-managed programs have to suffer with that?” asked Roger F. Martin, a Wisconsin insurance executive who serves as chairman of PBGC’s advisory committee.
Agreeing that they should not, Utgoff wants to charge companies varying rates for PBGC’s protection, based on the stability of their pension plans.
If the approach were carried to its extreme, well-financed plans in stable industries might pay the same as they do now, give or take a few dollars, while those at risk of collapsing might be charged as much as $200 to $300 per participant.
Switching to such a system would not be easy. Just figuring out a way to assess the relative insurance risks of various pension plans is a sticky proposition.
And companies facing whopping rate hikes would be certain to protest. “The companies that would have to pay $150 are companies that are in declining industries that have financial problems already,” observed Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.
Indeed, some observers wonder whether rate hikes of such magnitude would prompt employers to quit the pension business altogether and discourage others from starting new programs.
Such an approach “may make the system fairer to plan sponsors, but may harm participants if poorly funded plans terminate,” the nonprofit research institute warned in a recent report.
Most controversial of all, however, is the notion of “privatizing” PBGC--a step that could follow the introduction of a risk-related premium. “We offer one service at one price,” Utgoff noted. “If there were competition in the market, there would be different alternatives.”
The executive director envisions a pared-down PBGC that, in effect, subsidizes only the retirement programs of failing companies.
Insurance for others would be handled by the private sector, offering the presumed benefits of private management and, possibly, greater coverage than PBGC provides.
Martin’s advisory panel has set up a task force to study the issue and will release a report by the summer.
Meanwhile, critics ask if it makes sense for the government to farm out all the low risks, leaving itself as a last resort for companies shunned by the insurance industry.
“The private sector will be skimming the cream, and the government will be getting the crud,” Gordon said. “That’s what it comes down to. Somebody’s got to pay for it. What’s the great advantage of that kind of system?”
Clearly, such a profound alteration of PBGC’s role would provoke resistance. “I think politically it doesn’t have a prayer,” a House committee staffer said.
In recognition of such attitudes, those who want to restructure PBGC are focusing for now on the notion of imposing a risk-related premium.
“We believe that pensions should be insured, and that the government has an obligation to do that,” Martin maintained. “What we don’t believe is that the good guys should be paying for the bad guys.” THE 10 LARGEST CLAIMS INCURRED BY PBGC
Millions of dollars
Loss Before Year Company Assets Benefits Recoveries Pending Wheeling-Pittsburgh $200.0* $675.0* $475.0* 1985 Allis-Chalmers 5.0 170.0 165.0 1980 Wisconsin Steel 43.6 106.9 63.3 1981 White Motor 31.4 94.7 63.3 1982 Rath Packing 13.5 79.5 60.9 1982 McLouth Steel 54.4 113.6 54.7 1982 Braniff International 45.9 96.3 50.5 1983 Phoenix Steel 12.9 62.9 50.1 1982 White Farm Equipment 22.2 70.6 48.3 1977 Alan Wood Steel 9.5 50.0 40.5
Source: Pension Benefit Guaranty Corp.