Administration Offering Bill on Pension Plan Bailouts

The Reagan Administration, worried about federal bailouts of failed pension plans, will propose legislation today containing stiff penalties for companies that fall behind in funding their retirement programs.

The Federal Pension Benefit Guaranty Corp., which insures the retirement checks for 30 million workers enrolled in 110,000 private plans, is facing a massive $4-billion deficit because of its takeover of several steel industry pension programs.

The federal agency depends on annual premiums paid by employers, but this source of income falls short of the payments going to 150,000 retirees from insolvent plans.

Changes in Premium

To cure the deficit, the Administration will propose legislation calling for a new variable premium, ranging from $8.50 to $100 per worker, depending on the financial health of the pension plan. Businesses currently pay a standard premium of $8.50 a year for each worker, a charge established by Congress in 1986.

At least two-thirds of the pension plans, covering about 20 million workers, are in good financial health and would continue to pay the basic $8.50 premium to the federal agency, said Kathleen P. Utgoff, executive director of the Pension Benefit Guaranty Corp. Employers of the other 10 million workers would pay higher rates, but fewer than 3 million of these persons are working at firms that would pay the maximum $100 annual premium.

“Healthy plan sponsors are quite annoyed at having to pay for the abuses of some of their competitors,” Utgoff said in an interview.

Companies normally finance retirement programs by setting aside some cash every year for pension funds. However, some firms in financial trouble simply skip making the annual payments to their pension programs and use the cash for other corporate purposes.

Called Interest-Free Loan

Such diversion of workers’ pension funds is just the same as an interest-free loan, according to Utgoff. “Why should the workers loan them money if the banks won’t?” she asked.

If a company goes into bankruptcy, the federal pension guaranty corporation becomes responsible for its obligations. The Administration proposal seeks to discourage firms from letting their pension funds get into trouble.

The annual premium starts at $8.50 and then increases, depending on the “underfunding” of a particular plan. As the shortage in pension assets grows, the penalty increases, with the maximum premium set at $100.

The proposed legislation is the latest step by the Administration to contain problems in private pensions. In February the Labor Department proposed tougher laws restricting what pension administrators can do with surplus assets in their plans. The proposals also would require that a firm with several pension plans use its stronger plans to help out the weak ones.

The problems of the federal pension guaranty corporation are linked to the weak condition of the domestic steel industry, hard pressed by competition from imports. The steel industry traditionally enjoyed relatively high wages and high pension benefits. Now that many companies have fallen on hard times, the federal officials have been forced to rescue some big pension plans.

LTV Corp. Case Cited

When LTV Corp., the nation’s second-largest steelmaker, filed for protection under the bankruptcy law last year, the federal government took over $2.2 billion in unfunded promises to LTV workers and retirees.

All companies in the steel business face tough international competition. While many firms have well-funded plans, noted Utgoff, others “have chosen to solve their problems by underfunding their pension plans.”

The pension guaranty corporation now sends retirement checks to 150,000 persons, 80% of them former steelworkers. The maximum payment guaranteed by the government is $1,858 a month.

By making the poorly funded plans pay higher premiums, the Administration seeks to keep companies with financially sound programs from leaving the federal guarantee system. The strong companies could terminate their pension plans, using the assets to buy annuities--insurance policies offering future specified retirement payments.

If the healthy companies leave, “you start a rush to the door and the system becomes unstable,” Utgoff said.