No agreement on fixes for the $300 billion pension funding shortfall: Congress ponders controversial changes to federal pension regulations, but critics say they might leave plans even more dangerously short of money

Workforce, Sept, 2003 by Patrick J. Kiger

AS IF THE ECONOMIC DOWNTURN'S lingering fallout of layoffs, budget cutbacks and sagging employee morale didn't give human resources professionals enough to worry about, there's another dark cloud looming on the horizon: underfunded pension plans.

The situation is ominous. Over the past three years, thanks to the combination of a struggling stock market and low interest rates, companies have seen the value of the stock and bond portfolios in which they've invested their pension reserves plummet by nearly $1 trillion. The nation's corporate pension plans are $300 billion short of what they'll eventually need to cover the benefits for 44 million active and retired workers, according to federal government estimates.

It's a shortfall that threatens to wreak havoc with corporate balance sheets and dangerously strain the federal government insurer that backs up companies unable to make good on their pension commitments. But while it's obvious that something must be done about the pension-underfunding crisis, nobody can agree on a solution. Congress is pondering controversial changes to federal pension regulations that proponents say would make it easier for companies to weather the crisis, though critics say the changes also might ultimately leave pension plans even more dangerously short of money.

Meanwhile, millions of workers--some of whom have already received unsettling notices informing them that their companies' plans have dipped below federal funding requirements--are left to worry about whether they'll have enough money to live comfortably in their retirement years. The loss of worker confidence in pension plans could have a ripple effect, with a negative impact on everything from recruiting and retention to succession planning, according to compensation and retirement expert Brent Longnecker, president of the Houston area-based Resources Consulting Group. "There's been a lot of focus on the financial side, but every way you look at it, this is a big human resources problem as well." He says it's crucial for human resources leaders to plan for how they're going to deal with potentially pervasive impacts of pension underfunding, because the problem may well get worse before it gets better.

Clearly, executives are already worried about the damage that pension underfunding may cause to the overall health of their businesses. In a recent survey of 151 companies by SEI Investments, a consulting firm in suburban Philadelphia, 68 percent of the participants said the crisis had already had a negative effect on corporate finances. Fifty-eight percent said they'd posted lower profits as a result; and 75 percent were concerned about future impacts ranging from cash-flow problems and lower profits to a decrease in the value of company stock. Some prominent companies already have taken a major financial hit. General Motors, for example, found it necessary, last year to put up $5 billion in cash and to raise billions more through bond offerings to pump up its retirement fund, according to a report in BusinessWeek.

The government is just as alarmed. In July, a report by the General Accounting Office, the investigative arm of Congress, concluded that the Pension Benefit Guaranty Corp., which regulates and insures pension plans against failure, is in dire financial straits itself. Thanks to corporate bankruptcies, the PBGC's reserves have diminished from a $9.7 billion surplus in 2000 to a $3.6 billion deficit in fiscal year 2002, and the number of employees whose pensions the PBGC had to cover rose from 268,000 in 2001 to 400,000 last year; according to news reports. Already, some observers are drawing ominous analogies to the savings-and-loan crisis of the early 1990s, when the federal government was forced to spend hundreds of billions of dollars to bail out collapsing S&Ls. "It's mind-boggling," Longnecker says. "Years ago, would have said, sure, there will always be companies with underfunded pensions. But none of us ever imagined a situation this bad, where the PBGC itself would be in trouble."

Companies have been lobbying for a legislative fix that they think would help them to weather the crisis, at least for the short term, until the stock market recovers and pension funds' investments can recoup some of their losses. HR 1776, the Pension Preservation and Savings Expansion Act, introduced this past spring by Rep. Benjamin Cardin (D-MD) and Rep. Rob Portman (R-OH), would do this through bookkeeping. The Cardin-Portman bill would change, for at least the next three years, the complex method by which the government calculates corporate pension funds' liabilities, shifting the standard from 30-year treasury bonds to the long-term rate for corporate bonds. The practical result, experts say, would be that companies wouldn't have to put as much money into their pension plans to meet the federal standards for being adequately funded.

Deanna Keim, communications director for the American Benefits Council, which represents corporate pension plans, says the change would give a more accurate picture of companies' pension liabilities. Since the 30-year Treasury bonds were discontinued by the Bush administration, Keim says, they have an artificially low interest rate and no longer are a fair benchmark. As a result, she says, companies are being forced to sink too much money into their funds to comply with federal binding standards. In 2002, according to the council's calculations, companies had to contribute $43.5 billion to their plans--more than they had contributed in the previous three years combined. In 2003, they may have to shell out as much as $83 billion. It's money that companies might put to other uses--upgrading their technology, paying workers instead of laying them off--that could result in higher profits. That, of course, might ultimately contribute to higher stock prices, which in turn would lift the value of the assets in pension-fund portfolios.