Unhealthy Pension Plans Pose Gamble for Workers

Pan American World Airways, the world’s first international airline, has had its wings clipped by $2 billion in losses over the last 10 years. To stay aloft, it has sold many of its best assets, from its highly visible Pan Am building in Manhattan to its coveted Pacific routes.

And now Pan Am has tapped one of its last remaining sources of cash--the retirement nest eggs of 40,000 workers and retirees. In an unusual transaction, the struggling airline transferred ownership of the lease on its terminal at John F. Kennedy International Airport in New York to the pension plans in exchange for $169 million.

The deal provides a stark example of the way some companies are fighting their immediate financial problems by gambling with the future old-age benefits of their workers.

It also illustrates the wrenching dilemma confronted by workers forced to choose between their jobs and the safety of their pensions.

Sometimes the gamble works, the company recovers and everybody is happy. When a West German company acquired troubled Great Atlantic & Pacific Tea in 1982, it used $200 million in A&P; pension funds to finance its turnaround.

But if the business goes broke, workers often find themselves with less money for retirement--those with the best benefits usually lose the most--and the government agency that insures the pensions gets stuck with a bailout bill that could wind up on the doorsteps of America’s taxpayers.

To be sure, most of the nation’s 870,000 pension plans grew fat on the increase in the stock market during the 1980s. More than 80% of the plans are overfunded, which means that they have more money than projections show they will pay out in pensions. Overall, the system has a surplus of $250 billion.

Yet some companies do not have enough money to cover their pension payments. Often these companies have financial problems and are making only the minimum contribution to their pension plans or have received Internal Revenue Service approval to stop making payments.

The federal Pension Benefit Guaranty Corp., which insures most pensions, estimates that the underfunding gap is between $20 billion and $30 billion--not a staggering figure when weighed against total pension fund assets of $1.7 trillion or the $250-billion surplus.

But what raises concerns is the concentration of underfunding in particular industries, where a sharp cyclic downturn could cause widespread problems. The danger is compounded because many of these companies are already deep in debt as a result of mergers and other restructurings.

If a company with an underfunded plan declares bankruptcy, the PBGC takes over its pension plans and makes up the difference between the money in the plans and what is needed to pay the beneficiaries. The PBGC, which receives most of its working capital from a premium levied on employers, can try to recover its losses in the bankruptcy proceedings, but companies that have already borrowed heavily rarely have much left. PBGC recoveries average 8 cents on the dollar.

The PBGC executive director, James B. Lockhart, said in an interview that $10 billion of the underfunding is concentrated in 25 to 35 pension plans, most of them in the steel, auto and airline industries.

Some of these underfunded companies, such as Ford and General Motors, are healthy, said Lockhart. But for others, the situation is different.

Testifying before Congress on Oct. 24, Lockhart said that the pension plans of the major airlines are underfunded by about $2 billion. More than 75% of that amount is attributed to two companies in financial trouble--Eastern Airlines, which is in bankruptcy, has a $1.1-billion underfunding gap, and Pan Am has a $550-million gap, according to the PBGC.

“If PBGC had to assume responsibility for a couple of the larger plans, it could double our current deficit,” cautioned Lockhart.

The agency’s deficit--almost $4 billion, including a disputed $2.3 billion related to the collapse of Dallas-based LTV Corp.--is the difference between what it owes pensioners of plans it has taken over and what it projects receiving in employer premiums.

A repeat of the bankruptcy of LTV and other steel companies a few years ago is precisely what Lockhart wants to avoid with the airline industry.

Ailing steel companies had slashed or stopped their payments to pension plans in their struggle to survive. So when they folded, the plans were underfunded. Workers lost millions of dollars in benefits because there is a limit on how much the PBGC will pay. Despite that, the agency was driven so deeply into the red that congressional investigators warned the agency would be unable to fulfill its obligations to pensioners unless steps were taken quickly.

Congress responded by nearly doubling the annual premium employers pay the PBGC, from $8.50 per employee to $16. Congress also created a new premium formula enabling the PBGC to charge up to $50 per employee to companies with underfunded pension plans.

The changes did not erase the deficit, but they helped put the PBGC on better financial ground. It was not without cost. Healthy companies faced much higher premiums to make up for the problems of a few troubled firms, and some shut down their pension plans rather than pay more.

The biggest single cause of the PBGC’s financial problems was LTV’s bankruptcy in 1986. It left the PBGC responsible for claims of more than $2.3 billion for the underfunded pensions of 108,600 workers and retirees.

Late in 1987, however, the steel industry began to turn around, and so did the fortunes of LTV, partly because it no longer had to make pension payments. The PBGC, claiming that LTV had declared bankruptcy to shift its pension obligations to the agency, tried to force the company to resume paying its pensions.

The company refused, claiming, among other things, that the $120 million in annual payments would damage its ability to emerge from bankruptcy. Two federal courts upheld LTV’s refusal, and last month the Supreme Court agreed to hear PBGC’s appeal of the rulings.

The LTV case put the PBGC on the horns of a dilemma.

The agency has sought to reassure the public that the nation’s pension plans are basically safe and secure. Yet in persuading the Supreme Court to take the LTV case, the PBGC stressed the severity of the problem posed by LTV and many other companies with underfunded pensions.

“Many of the nation’s private pension plans are substantially underfunded, often by hundreds of millions or, as in this case, billions of dollars,” PBGC lawyers told the court. “The most severely underfunded plans generally are maintained by employers who are themselves in significant financial difficulty and, often, in bankruptcy.”

Unless the LTV ruling is reversed, the PBGC told the court, more companies could dump pension plans on the agency and create “a financial crisis” on a par with the $150-billion taxpayer bailout of the savings and loan industry.

Yet Lockhart and other officials complain that such parallels, when drawn by others, are unfounded and sensational.

When the Labor Department’s acting inspector general told Congress last August that the lack of enforcement of pension laws was comparable to the abuses of the savings and loan industry, the pension industry and its regulators rushed in with denunciations.

“Pensions are generally well-funded investments, diversified and professionally managed,” Lockhart stressed in the interview last week. “And they have conservative accounting, in contrast to the S&Ls.;”

Congressional staff members and others say that changes in the pension law in 1985 and 1987 make it more difficult for a repeat of the LTV situation. The changes also provide the agency and pensioners with a better chance to recover lost benefits in a bankruptcy.

There appears to be no reason to fear that the nation’s pension system is on the verge of becoming a national basket case. But that does not mean that there are not concerns.

The Labor Department inspector general has said that the department’s regulation of the industry is weak and ineffective. While the assets of pension funds have tripled in the last 10 years, the number of investigators has been cut in half and the number of investigations and reviews has declined 80%.

The problem of underfunding in some industries, coupled with the heavy debt that hundreds of companies have accumulated in the 1980s, also creates edginess at the PBGC and in other quarters.

“Underfunding would only mushroom into an S&L-type; crisis if several big ‘ifs’ were fulfilled, such as more corporate leveraging and more erosion of the barriers against extraordinarily risky investing,” said Walter K. Olson, a senior fellow at the Manhattan Institute for Policy Research.

Some critics of the Pan Am lease transfer view the transaction as too risky.

An official of the Teamsters, the only Pan Am union to oppose the deal, called it “smoke and mirrors” in a Labor Department hearing.

Connecticut National Bank, which was hired to review the transaction on behalf of the pension plans, withdrew after telling the Labor Department that it was unable to determine the cost of potential repairs because of the presence of asbestos in the aging terminal at Kennedy Airport.

The bank’s replacement, Bear Stearns Fiduciary Services, found that the transaction was a good investment for the pension funds. Based on an examination by an environmental firm, Bear Stearns dismissed the asbestos concerns as unwarranted.

Bear Stearns, a subsidiary of the big New York investment house of similar name, offered Pan Am more than just its study for its $150,000 fee. Its president is Francis X. Lilly, the Labor Department’s top lawyer from 1983 to 1985, who represented Pan Am when it sought Labor Department approval for the lease transfer. Pan Am needed the department’s approval for the transfer.

Pan Am had tried several times before to sell the terminal lease, but the Port Authority of New York and New Jersey, which owns the facility, had blocked those deals. The port authority, however, approved the transfer to the pension plans.

An appraiser hired by the company valued the nine years remaining on Pan Am’s lease on its Worldport terminal at the airport at $169 million.

Under the agreement, Pan Am sold the lease to the pension plans for $65.6 million in cash, and then was freed of the obligation to make another $104 million in back contributions to the plans. The airline was also obligated to pay the plans $2.8 million a month in rent for the terminal.

At a Labor Department hearing on the transfer last May, Lilly and Pan Am officials described the transfer as beneficial to the pension plans and painted a grim picture of the alternatives.

Without the transfer, Pan Am would have to pay the funds $127 million in contributions in 1989, an amount that exceeded the company’s cash balance, said its treasurer, David Davies.

Companies in financial distress can obtain waivers of pension fund contributions from the IRS. The IRS has been criticized for being too generous with its waivers, but the alternative is often the shutdown of a plan.

The law limits the number of waivers that a company can receive in a 15-year period, and Pan Am was already at the limit. It had been allowed to withhold more than $200 million in payments since 1981.

Critics of the deal said at the hearing that Pan Am probably would not be good for its required monthly rent payments of $2.8 million if it went bankrupt. They pointed out that the lease would represent 29% of the pension plans’ assets, a high proportion given the mandate that plan funds be diversified to ensure their safety.

Yet the only union to oppose the deal was the Teamsters, who have been engaged in protracted negotiations with Pan Am on other issues. Representatives of other workers described the transaction as an alternative to bankruptcy.

“I think that a majority, a vast majority, of the employees at Pan American would rather keep their jobs than lose their jobs,” said Tom Lambert, who represented 1,200 active and retired flight-crew members.

The union for Pan Am’s 5,000 flight attendants did not speak out on the transaction because, as union official Brian K. Moreau said, “We felt it was damned if you do the deal and damned if you don’t.”

The Labor Department approved the transfer in August. The PBGC was not officially involved, but because it will have to pay off the pensions if Pan Am goes bankrupt, Lockhart said that the agency was aware of what was happening.

The bottom line is that, if the gamble pays off and Pan Am survives, the lease transaction will be heralded as a great deal. If the airline goes under anyway, the PBGC will probably have to cover the $65.6 million in cash that the plans returned to Pan Am as well as several hundred million dollars more in underfunded pensions.