Special pension funding break would widen gap in worst-funded plans by $40 billion
FOR IMMEDIATE RELEASE
November 11, 2003
Most plans on PBGC's high-risk list would be exempt from making payments
WASHINGTON - If Congress waives the special rules designed to speed up cash contributions to severely underfunded pension plans, the shortfall in these plans would grow by $40 billion over the next three years, according to an analysis by the Pension Benefit Guaranty Corporation.
Legislation approved by the Senate Finance Committee would give the worst-funded pension plans a three-year exemption from the deficit reduction contribution (DRC), a stronger set of funding rules enacted in 1987 to protect workers and the pension insurance program from suffering large losses when underfunded plans terminate. The exemption would allow companies sponsoring these plans to skip $30 billion in pension contributions from 2004 through 2006.
"Giving a special break to weak companies with the worst-funded plans is a dangerous gamble," said PBGC Executive Director Steven A. Kandarian. "The risk is that these plans will terminate down the road even more underfunded than they are today. If that happens, workers will lose promised benefits and the pension insurance program will suffer additional multibillion-dollar losses."
Many of the companies that would benefit from the exemption pose a heightened risk of defaulting on their pension promises. The PBGC estimates that overall pension underfunding in plans sponsored by financially weak companies exceeded $80 billion as of Dec. 31, 2002. The DRC provision would allow companies representing nearly $60 billion of this "at risk" liability to stop making accelerated pension contributions. The average funding ratio of these plans on a termination basis is less than 60 percent.
The PBGC also examined underfunded plans that have terminated since 2000 to see how many would have been exempt from the DRC. Nearly 90 percent of these plans, which failed with insufficient assets to pay all promised benefits, would have had their contributions waived under the Senate provision. This includes the largest claim in the PBGC's history, Bethlehem Steel at $3.9 billion.
In the absence of the DRC, companies would pay for promised benefits under the weaker1974 funding rules. Those rules allow companies to fund benefit increases over 30 years. By contrast, the DRC requires plan sponsors to pay off their unfunded liabilities over three to seven years-a faster schedule designed to get cash into pension plans before companies fail and transfer their liabilities to the PBGC.
If any of the pension plans granted a DRC exemption were to terminate, the cost would be borne by workers, retirees and other companies. Plan participants would lose because the law places limits on PBGC's benefit guarantees. In the case of Bethlehem Steel, the PBGC is responsible for paying $3.9 billion of the plan's $4.3 billion in unfunded liabilities, which means workers and retirees are losing $400 million in promised benefits. In the US Airways' Pilots Plan, the PBGC will pay roughly $600 million of the $2.2 billion in unfunded liabilities, resulting in $1.6 billion of pilot losses.
Financially healthy companies with better-funded pension plans would also pay a price. The PBGC is a government corporation self-financed by premiums that pension plan sponsors pay into the insurance system. As of August 31, the PBGC's single-employer insurance program had a deficit of $8.8 billion. "If companies do not pay for their benefit obligations, someone else must," Kandarian said. "In this case, other employers would face higher costs supporting the PBGC despite having adequately funded their own plans."
"Changes to the deficit reduction contribution could be a reasonable way to reduce contribution volatility, but they should only be pursued in the context of other reforms that strengthen long-term pension funding," Kandarian said. "Abandoning the deficit reduction contribution without an effective substitute would put workers, retirees and other companies at risk."
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PBGC No. 04-10