U.S. Pension Plan Deficit Grows 34% to $71 Billion
The nation’s defined-benefit pension plans are $71 billion short of the amount needed to pay benefits to prospective retirees, Pension Benefit Guaranty Corp. said Monday.
Partly as a result of low interest rates and poor investment returns, the gap between what companies have in pension reserves and what they’ve promised in retirement benefits widened nearly 34% in 1993 from 1992, government officials said. Roughly 8 million workers are at risk--and about 1.2 million of them are employed by financially ailing companies that may have difficulty making up the shortfall, officials said.
The pensions at risk are primarily in the steel, auto, tire and airline industries, according to Secretary of Labor Robert B. Reich. If a pension plan fails, Pension Benefit Guaranty coverage is limited to $30,681.84 per individual this year, often less than the promised benefit. The annually adjusted payment will be $30,886.32 next year. A list of companies with troubled plans will be released next year.
However, there is also good news on the pension front that could avert a crisis. Passed with the recently approved General Agreement on Tariffs and Trade are measures aimed at making retirement plans safer. While some critics say the reforms are insufficient, the bill is at least a step in the right direction, according to other pension experts.
The pension measures, dubbed the Retirement Protection Act of 1994, give government pension officials greater authority to penalize companies that fail to keep their retirement plans viable. They also require administrators of underfunded plans to disclose more information to affected workers, including the plan’s funding levels and the limitations on Pension Benefit Guaranty coverage.
Pension Benefit Guaranty backs 66,000 defined-benefit plans. But the agency does not back--or police--defined-contribution plans, such as 401(k) programs.
Specifically, the new law requires pension plans that are less than 60% funded to contribute extra funds until the plan is in better shape. And it allows government officials to dramatically boost insurance premiums for underfunded plans--sometimes actually doubling or tripling premiums. On the other hand, plans that are fully funded are relieved of quarterly contribution requirements and companies that offer both defined-benefit and defined-contribution plans will be granted excise tax relief.
The law bars companies from using dubious accounting techniques to make their plans seem healthier than they are. Particularly targeted are plans that double-counted certain assets and those that made faulty assumptions about prospective interest rates and employee mortality.
Companies determine how much they need to fund their pension plans by making assumptions about how long their employees will work and draw pensions and how much interest the pension savings will earn before workers begin draining the fund.
If a company assumes its workers will all die within months of retirement--or that its pension assets will double and triple thanks to stunning investment earnings, it needs less money in the pension. Pension guaranty officials, who pick up the tab when these assumptions prove flawed, can now require specific mortality and interest rate tables in calculations.
Underfunded plans will also be required to provide more information to both Pension Benefit Guaranty and their workers. For example, pension officials must be provided with advance notice of transactions that might jeopardize employee pensions. Pension Benefit Guaranty will now have the right to object--and sometimes bar--transactions that would jeopardize pensions. (A recently passed bankruptcy law also gives pension officials a bigger voice in bankruptcy proceedings.)
Workers, on the other hand, will be given clear disclosure statements that describe the pension plan’s funding level and the limitations on Pension Benefit Guaranty coverage. Only troubled plans will be required to provide the additional disclosures, but pension officials believe the program will generate such employee interest that all plans will revise and improve the information provided to workers.
Finally, the act gives Pension Benefit Guaranty the ability to take companies to court if they miss more than $1 million in payments to their pension plans. This provision is expected to dramatically aid pension officials in heading off serious underfunding problems. Indeed, officials said the act nearly guarantees that large underfunded plans will strengthen and that the chronic deficits suffered by the pension guaranty organization will be eliminated within 10 years.
“This is a great day for American workers,” Secretary of Labor Robert B. Reich said in a statement. “Pension promises will be kept and the PBGC will remain strong.”
However, other pension experts say the bill is no panacea. Stephen R. Kerns, president of the American Society of Pension Actuaries in Washington, said more is needed.
Current rules, even in the new law, limit the amount that companies can contribute to their pension plans. Companies that want to contribute more--because they think that either their workers will live longer than average or that the plan will earn less on its money--are restricted from doing so, Kerns said.
“We have a real crisis coming down the road when the baby boomers begin to retire,” he said. “If we don’t have something comprehensive in place before that happens, I’m afraid we’re going to be in real trouble.”
Growing Gap
The difference between what U.S. companies have in pension reserves and what they are estimated to need for retirement benefits rose nearly 34% in 1993. The shortfall, in billions of dollars:
$71.0
Source: Pension Guaranty Corp.
