Washington's cop on the pension beat is getting tougher, making sure that workers will get the full retirement checks owed to them, no matter what happens to their employer.
With comparatively little fanfare, the Pension Benefit Guarantee Corp. has negotiated agreements in the last year for 11 companies to kick in more than $1 billion to strengthen pension plans covering 180,000 workers. It's a trade-off: The government says to a company, "You can make a deal for a merger, an acquisition or a spinoff, make a public offering, but you better add some money to your weak pension plan."
Gulfstream Aerospace Corp., for example, is going public, and it agreed last month to give another $120 million over five years to its pension plan.
The deal was the latest example of the PBGC's imaginative early-warning program, in which regulators negotiate a good deal for retirees without having to use the government's atomic bomb: a court fight to claim corporate assets.
Early warning is "the centerpiece of our enforcement efforts," Martin Slate, the PBGC's executive director, said in a recent speech to pension managers. "When we identify a corporate transaction that might jeopardize pension benefits, we step in and negotiate protections."
Instead of waiting until a pension fund goes bust, the PBGC takes a look at a long list of corporate events that could somehow hurt retirees' finances: merger, reorganization, downsizing, plant closings, extraordinary dividends and the redemption of more than 10% of stock.
The PBGC plays the role of referee who keeps things honest on the boisterous playing fields of capitalism. The agency, created in 1974, guarantees pensions earned by 42 million workers and retirees who participate in retirement plans operated by 55,000 employers and industries. These are defined-benefit plans--the worker knows how much he or she will receive each month after retirement.
The government collects premiums from companies for each worker and acts as an insurer of last resort: If a plan goes broke or a company goes out of business, Uncle Sam will guarantee the pensions promised to the workers. Last year, the PBGC paid $763 million in monthly retirement benefits to more than 182,000 people whose corporate pension plans had collapsed. The maximum monthly payment allowed by the PBGC is $2,642 at age 65.
The PBGC was passive for most of its history, waiting to step in with a rescue when a company abolished its pension plan or a program collapsed for lack of funding. But the philosophy changed in late 1992 with the creation of the early-warning program under former director Jim Lockhart, and its vigorous expansion under Slate, executive director since 1993.
"We have all the tools available to people on Wall Street," boasts Slate, talking about his staff of experts who scan the financial wire services, analyze corporate balance sheets and talk with managers and investors.
The agency worries about the big dollars, the situation at approximately 400 companies each with a pension plan underfunded by at least $25 million. Underfunding is a fancy word for a cash shortage in the pension fund--the amount needed to make good on pension promises if the company disappeared tomorrow.
The 400 targeted companies are less than 1% of all employers with insured plans, but they account for 80% of the potential losses if the government has to take over.
"We like to get in early and tailor our approach" to the particular company and the specific transaction the company is planning, Slate said.
Sometimes the PBGC will be satisfied with simple cash, a beefing up of pension funds. At other times it might want a contribution of securities. When General Motors sold its EDS division, GM agreed to contribute a package of both cash and stock to the GM pension funds.
When Pitney-Bowes spun off Dictaphone as a separate company, it agreed to pledge permanent responsibility for the Dictaphone pension fund. If something happens to Dictaphone in the future, Pitney-Bowes will make good on the pensions.
The early-warning policy got some additional legal tools in 1994 when Congress required companies with more than $50 million in underfunded pensions to give the PBGC more detailed actuarial and financial reports. And the new law also ordered privately held companies to give the PBGC advance notice of corporate transactions.
Slate came up with another innovation last month in carrying out the biggest rescue ever of an industrywide pension fund, the joint employer-union program for workers in the men's suit industry, which is in sharp decline. Companies are contributing 10% of payroll to the fund, but the number of firms has shrunk to 200, down from 575 just a decade ago.
In return for an employer's pledge to stay in the fund, the PBGC promised that contribution rates would stay the same, and the government would make up any future shortfall in the fund. This will reassure employers, and prevent a death spiral for the suit makers' pension system, as fewer and fewer companies carry the burden.
Slate figures that even if the government has to step in and save the fund someday, the savings for the taxpayers will be $50 million or more because employers will be contributing for years to come.