Bradley D. Belt
Executive Director, Pension Benefit Guaranty Corporation
to the American Bankruptcy Institute
Thank you for the opportunity to be with you today to discuss the interaction of the Employee Retirement Income Security Act (ERISA) and the Bankruptcy Code, and the role of the Pension Benefit Guaranty Corporation (PBGC) in that process.
In the interests of full disclosure, let me note that I am not a bankruptcy lawyer; until I took this position two years ago, I had strenuously avoided any contact with the Code-professionally or personally.
Much has changed since then. While I'm still not a bankruptcy lawyer, and by no means an expert, I've certainly had occasion to learn much about bankruptcy law and, more importantly, the rhythms and dynamics of complex bankruptcy cases. As you are aware, the PBGC has been and is a key player in some of the largest and most complex corporate restructurings and bankruptcy matters in our nation's history-United, Enron, Delphi, Delta, Northwest, Kaiser Aluminum, Bethlehem Steel, to name just a few. In fact, we currently have pending more than 300 bankruptcy cases.
Moreover, as my name has shown up in a few cases, and bankruptcy, district, and circuit court judges have speculated on what I may have been thinking (as the agency decision-maker) in certain matters, then perhaps you will indulge me a few ruminations about the bankruptcy process, particularly as it applies to a company's pension liability.
I would note that the Bankruptcy Code, and especially Chapter 11, is a uniquely American institution; in most countries, if you can't pay your debts, you go out of business. However, we are a society that believes in forgiveness and second chances, and I would be loathe to question the validity or merits of providing a mechanism for private enterprises that encounter business hardship to try to address their challenges under court supervision.
What does require care is to appropriately balance competing interests. One of the great attributes of the American economy is constant change and innovation-capital will flow to new enterprises with better business models. It would strike me as not in the broader public interest if the bankruptcy process is used as a means to prop up tired or failed business models, to the disadvantage of new competitors or better mousetraps. We should also be concerned about the extent to which having Chapter 11 available as a safety valve discourages companies from responsibly meeting their financial commitments in the first instance.
That brings me to the intersection of the Bankruptcy Code and ERISA; or perhaps collision is a better way to put it. Mixing metaphors, it's like mixing oil and water. The two just don't go together very well. The Code and ERISA have very different objectives, with different stakeholders and equities. I appreciate the difficult job facing bankruptcy judges, especially shepherding complex, multi-year cases through the process. But the problem, from my perspective, is that all too often bankruptcy judges view the Code as sacrosanct and seemingly ignore or give scant consideration to the public policy considerations embodied in ERISA.
The bottom line is that this collision-like most collisions-leads to bad outcomes for key stakeholders. It's a binary decision-maintain the pension plan(s) or off-load this "excess baggage"-and all the pressures and incentives built into the bankruptcy process are to off-load. But, when underfunded pension plans are terminated in a Chapter 11 reorganization, there are a lot of losers-workers and retirees who may get a cutback in promised benefits; responsible companies that face having to pay higher premiums to the insurance system; business rivals, who must now compete against a company whose labor costs are being effectively subsidized by the federal pension insurance program; and possibly American taxpayers, who may be called upon to bail out the insurance program when the well runs dry.
And that gets to one of the principal concerns I have about the way in which the Code and ERISA interact. The Chapter 11 process is essentially a somewhat consensual process of dividing up the economic interests of an enterprise when it is not able to satisfy all its obligations. The owners of the firm, shareholders are typically wiped out in this process. Reorganization is really about creditors.
But, it is important to understand the difference between the PBGC as creditor and all other creditors. All other creditors enter into the relationship with the company volitionally; the terms of the relationship are negotiated; other creditors are specifically compensated for the risk that the company may default on its obligations. The PBGC's role as creditor is a statutory one-it is involuntary, not negotiated, and the insurance program is not really compensated for the risk of default.
More importantly, there are externality losses when the pension insurance program is involved, beyond those borne by other creditors. The PBGC is simply a pass-through-it does not have an economic interest of its own but rather represents the interests of all the stakeholders in the insurance system.
So, for example, I find it troubling when a bankruptcy court finds (as in Kaiser Aluminum) that all the plans sponsored by a company can be considered in the aggregate in meeting the distress test-despite ERISA requirements that the test be met on a plan-by-plan basis-because it would be "inequitable" to favor one group of employees over another. Forget for a moment the fact that companies disparately treat their employees all the time-some are paid more than others, some have defined benefit plans while others have defined contribution plans, some defined benefit plans are much more generous than others, et cetera. How does that equity outweigh the inequity to all stakeholders in the insurance system who must bear the costs of additional losses in the system that need not and should not have been incurred?
Similarly, notwithstanding the fact that ERISA provides the basis for calculating the amount of the unfunded benefit liability claim the PBGC has against a sponsor in the event of termination, some courts have ignored ERISA and taken it upon themselves to establish a different basis for valuing the claim-the so-called "prudent investor" rate. It's really a rather remarkable notion-that the liabilities should be priced as if the participant would choose to lend to the company on a go-forward basis. Of course, any new lender would demand to be well-compensated given the financial fragility of the enterprise. But, participants are interested in getting what's already owed to them, not in extending new credit.
Often overlooked, as well, is the fact that PBGC's role in the process is not limited to that of a contingent or actual creditor. PBGC also is responsible for administering and enforcing Title IV of ERISA. The agency has a statutory responsibility to protect the interests of the federal pension insurance program and its stakeholders, which include participants in pension plans at risk of termination, all insured participants, premium payers and, ultimately, taxpayers. As such, the PBGC strives to prevent avoidable losses, mitigate risks, maximize recoveries, and enforce compliance with Title IV.
As a regulator, our authorities are more limited than those of other financial regulators and federal insurers. The FDIC, for example, has several enforcement arrows in its regulatory quiver that better enable it to protect against bank failures, including the authority to issue cease-and-desist orders. While PBGC's tools are more limited in scope, the agency uses them as proactively and aggressively as appropriate to protect the insurance program. Among other things, we have the authority to:
- conduct examinations, audits, and investigations;
- issue subpoenas;
- act to prevent long-run losses and evasion of liability;
- bring actions in federal court for legal or equitable relief; and
- bring actions for breach of fiduciary duties (if we have become plan trustee).
Now, ERISA provides that actions we initiate are to be brought in federal district court. However, I'm continually advised by my lawyers that we need to tread carefully, for fear of irritating a bankruptcy judge who may view any such action that we might take in district court as an affront to his or her authority or jurisdiction. I truly hope that would not be the case; I can't imagine that any judge would have any qualm about a government agency using the authorities granted to it by Congress to protect the public interest.
This brings me back to the point that current law leads to consistently bad outcomes. To the extent that the Code and ERISA don't play well together, what changes can or should be made to either to improve the situation?
Well, the starting place is what the Administration proposed last year-strengthen the funding rules. Simply put, if there were sufficient assets in the pension plan to cover the promises made to workers and retirees, then the PBGC wouldn't be much of a factor in a Chapter 11 proceeding; in fact, there might not be a need to obtain the protection of the bankruptcy court at all. I probably wouldn't be speaking to you today if the funding shortfall in United Airlines had been $10 million instead of $10 billion, or if the shortfall in Bethlehem Steel had been $4 million instead of $4 billion.
That deals with the future, what about the here-and-now? There are many companies that are in financial distress that sponsor deeply underfunded pension plans. Most commentators would agree that it has become all too easy to dump pension obligations; and too many CEOs appear to view the distress termination process as a legitimate means of responding to a competitive threat or gaining a competitive advantage-which is clearly not the purpose of ERISA.
Some argue that a plan should be able to be terminated only in the event of liquidation. But, to the extent that Congress believes there should be a safety valve, then, in my view, it needs to be tightened. I would note that more than two-thirds of CEOs recently surveyed by Grant Thornton expressed the same view. The one-third that didn't are probably those who are in a deep hole and interested in maintaining the termination option!
Terminating a pension plan should be a last-resort option, not the path of least resistance. In that regard, I would note that there are administrative remedies under current law that companies can avail themselves of to deal with temporary business hardships and their near-term pension funding obligations-such as funding waivers, amortization extensions and prohibited transaction exemptions. I would hope that bankruptcy courts will inquire of debtors whether they have pursued such remedies if they are seeking to terminate their plans under the distress process. If not, they might be encouraged to do so.
There also needs to be greater accountability for decisions made and actions taken that have gotten us to where we are today. We are here not by accident but as the result of conscious decisions made with regard to the benefits granted and funding policies pursued. While the rules may have allowed companies to dig deep holes, they didn't mandate such an outcome. Fiduciaries of pension plans have a responsibility to act in the best interests of plan participants, not management, shareholders, or other creditors. I would observe that there is increasing investor and regulatory scrutiny of issues related to funding pension plans and decision-makers face reputational and legal risk if they are not acting appropriately.
In closing, is there a need to address the "legacy" cost challenges facing many American companies? Absolutely. Is the best way to do this through the back door of the pension insurance program and Chapter 11? Absolutely not.