The Domino Effect

Ailing pension plans could overburden the PBGC and send premiums soaring.

United Air Lines is trying to lighten its load. Last November, the bankrupt carrier proposed terminating up to four of its pension plans that were collectively underfunded by $8.3 billion. But doing so would transfer a payload of up to $6.4 billion to another struggling organization: the Pension Benefit Guaranty Corp. (PBGC).

The PBGC, the government agency that insures defined-benefit pension plans, already assumed responsibility last December for United’s pilots’ plan. And in early February, the agency announced it would take over US Airway’s three pension programs, which added another $2.3 billion to its burden. These are merely the latest in a string of worrisome plan terminations. In fiscal 2004, which ended September 30, the agency’s net loss of $12.1 billion included a $14.7 billion loss from completed and probable pension terminations. Its year-end deficit rose to $23.3 billion, up from $11.2 billion in 2003.

Discouraging numbers, to be sure. The question now is what precedent these bailouts will set for other distressed airlines. At the end of calendar year 2003, the PBGC had a potential $31 billion exposure to 11 airlines, whose plans covered 440,000 participants.

“Certainly, if we were to absorb all the defined-benefit plans in the airline industry, that would have an adverse financial impact on the pension insurance fund,” says Bradley D. Belt, the agency’s executive director.

In a worst-case scenario, companies in other beleaguered industries could follow suit and dump their defined-benefit plans, causing the private pension system to wobble. “I think it’s horrible what many companies with underfunded defined benefit plans are doing in terms of dumping them to the federal government,” says Mark White, CFO of SAP America, a subsidiary of software giant SAP AG. “They’re pushing their problems to the taxpayers as a way of lowering costs.” And companies like SAP, with well-funded pension plans, will also suffer by paying higher premiums to the PBGC.

For the near term, at least, the PBGC says it has adequate resources. “With $39 billion in assets, we can continue to meet our obligations for a number of years,” said Belt last November. “But with more than $62 billion in liabilities, it is imperative that Congress act expeditiously so that the problem does not spiral out of control.”

In January, Secretary of Labor and PBGC chair Elaine L. Chao announced that her department would soon introduce reforms designed to shore up the health of the pension system. Ultimately, of course, any such reforms will have to be approved by Congress (see “Underfunding Fixes,” at the end of this story).

Double Whammy

The worsening financial shape of the PBGC mirrors the declining health of the overall pension system. In 2004, 326 companies in the S&P 500 had underfunded defined-benefit plans, according to a recent study by Credit Suisse First Boston analysts David Zion and Bill Carcache, up from 320 in 2003. Zion estimates the aggregate shortfall for these plans now stands at $185 billion, compared with $172 billion in 2003. Among single-employer plans overall, the PBGC estimates that total underfunding for fiscal 2004 surpassed $450 billion, $100 billion greater than the total for 2003.

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