Corporate Pensions Are Less ‘Raid-Proof’ Than Governments’

The most disturbing news to come out of the collapse of the late publisher Robert Maxwell’s business empire is that he looted up to $1.4 billion from pension funds of his British companies.

To Americans already worried about pensions--and understandably frightened after the disasters in S&Ls; and junk bonds--the immediate question is: Could Maxwell have done that here?

The answer, basically, is no. That’s not to say there are no worries in U.S. pension funds, but an American corporate chieftain could not simply transfer pension assets from a public company to one of his private holdings, as Maxwell did.

U.S. regulation under the Employee Retirement Income Security Act of 1974 (ERISA), which is tougher than British law, requires that an outside trustee--not connected with the company or employees--approve all transactions. No U.S. trustee would have allowed Maxwell’s transfers, which clearly suggest conflict of interest.

Also, the Pension and Welfare Benefits Administration of the U.S. Labor Department would have demanded constant disclosure and explanation from Maxwell of how pension fund investments benefited his employee plan participants.

That’s one reason why U.S. pension authorities have found the funds of Maxwell’s U.S. companies--the New York Daily News, MacMillan publishing and others--adequately financed and free of irregularities.

Still, the fact that the U.S. system thwarted Maxwell won’t stop many U.S. employees from worrying. Pension money is too important.

First, the monthly private or state employee pension will pay more than Social Security for most of the 55 million covered employees.

Second, the U.S. pension system represents an enormous amount of money--almost $3 trillion in public and private funds--invested in stocks, bonds and real estate. The fear is that such a honey pot will prove too tempting for corporate manipulators or state and local politicians looking for ways to balance budgets.

Some of those fears are overblown, and some may be well founded. But if U.S. employees understand what’s going on, chances are that the pension system--one of the financial glories of the post-World War II era--will come through all right.

Right now the pension funds of 85,000 companies governed by ERISA are more secure than public employee funds, which are threatened by politicians desperate for cash in a time of tight budgets.

Corporate pensions, helped by bull market investment gains, are funded at 142% of requirements, according to Buck Consultants, a pension advisory firm. That means that if all the funds were terminated today, there would be more than enough money to meet all pension requirements.

But the extra money is not a surplus. Rather it’s a reserve against future requirements--when more people will be retired.

Also, overall corporate pension over-funding doesn’t mean that some pension funds don’t go broke. Pan Am went bankrupt this year and left its pensioners to the government’s Pension Benefit Guarantee Corp., which shelled out $900 million to meet obligations to the airline’s 35,000 employees.

The PBGC’s money came from premiums assessed on healthy companies--ranging from $17 to $50 per employee. The PBGC has $3.3 billion in assets, a sum that could be quickly depleted if bankruptcies multiplied.

Thus, the agency is seeking new legislation to force troubled companies to keep contributions to their pension funds up to date, even as PBGC officials say the corporate pension picture on the whole is sound.

More worrisome are state and local employee funds, which are not governed by ERISA, and increasingly are being seen by political leaders as the answer to fiscal problems.

For example, Gov. Pete Wilson last June simply appropriated $1.6 billion from the state employees pension fund to balance California’s budget. The state employees have sued, but justice is slow, and meanwhile Wilson’s Administration can use the money.

Elsewhere, state administrations have been under-funding or tapping pension funds for years, according to an article in Barron’s newspaper. New York Gov. Mario Cuomo defends the idea, finding it logical that New York employee pensions should be invested in New York state, to build roads and bridges or pursue other purposes.

It’s an argument with a subtle attraction to it. But it’s also a false argument that violates several principles of the modern pension system as it was devised in the early 1950s by GM’s then-President Charles E. Wilson. A prime rule was that employees’ money should be diversified, with not more than 5% invested in their own company.

“And an overriding principle is that the funds be managed solely for the benefit of the participants,” says Nell Minow, co-director of Institutional Shareholder Partners, a private consulting group, and a former official of the Labor Department’s pension agency. That means that investments must earn a return to pay for retirement, “and all other worthy causes, be they taxpayers or environmentalists, come second,” Minow says.

Nonetheless, as budgets tighten, it is inevitable that there will be increasing demands to use public pension funds for political purposes. In reaction, state employees are calling for a federal law like ERISA to govern public pension funds. Such a law saved U.S. pensions from Maxwell; maybe it can do the same for pensions threatened by revenue-hungry politicians like Wilson and Cuomo.