As United terminates fund, stress on pension system takes spotlight

0 Comments | Deseret News (Salt Lake City), May 16, 2005 | by Sue Kirchhoff, Stephanie Armour

WASHINGTON -- Ray Brice, 62, of San Rafael, Calif., expected to cruise along after retiring as a United Airlines pilot two years ago with a $12,000-a-month pension. Not any more.

Last week's federal court ruling allowing United to terminate its drastically underfunded pension plan and pile $6.6 billion of liabilities onto a small federal agency, means his monthly check could be cut about 80 percent, to about $2,000.

Brice's situation is stark, but no longer unusual.

The United pension default -- the largest in U.S. history -- comes atop a string of bankruptcies and retirement plan meltdowns in the steel, retail and other industries in the past several years that have directly affected the retirement security of millions of Americans and prompted millions more to worry whether they're next.

The latest high-profile case illustrates what Bradley Belt, executive director of the federal Pension Benefit Guaranty Corp., which insures traditional pension plans, calls severe stress in the U.S. pension system, and puts increased pressure on the White House and Congress to act before the situation becomes worse.

The PBGC, funded through corporate premiums, has moved from about a $10 billion surplus in the late 1990s to a $23 billion deficit.

The agency had $39 billion in assets and $62 billion in long- term liabilities. At the same time, the PBGC estimates underfunding in the pension system has reached a record $450 billion, with auto, airline and retail industries at most risk.

"We have sufficient liquidity to pay benefits at the pace we're paying them now for several years, but we clearly do not have the ability over the long run to honor all the obligations we've taken on," Belt says.

The situation can be resolved three ways, he says: more money from corporate premiums; an eventual taxpayer bailout; or reduced pension benefits.

Beset by complex issues

Bankruptcies and underfunding aren't the only issues.

Companies are abandoning traditional defined-benefit plans -- corporate-funded pensions that provide a set monthly payment on retirement -- in favor of defined-contribution plans such as 401(k)s, in which employees make contributions, often with a company match. Half the pension plans in the country have been lost in the past decade, according to the American Benefits Council. About 41 million people are now covered by a traditional defined benefit, compared with 60 million in defined-contribution plans.

Many companies that still provide traditional pensions are freezing benefits and enrollment or shifting to so-called cash- balance plans and other hybrids that combine elements of traditional pensions and 401(k)s. Such plans now cover 25 percent of people in what are classified as traditional pensions. Even workers at healthy firms can suddenly see their pension plan altered in a corporate merger. And there is uncertainty about the security of cash-balance plans, due to court challenges.

The need to bolster pension funding is also one reason some companies have been slow to hire or expand capital spending.

Charles Warren, 63, of Surprise, Ariz., had his pension reduced by about $100 a month after the company he retired from, LaClede Steel, filed for bankruptcy. He retired in 2000 after working in materials management.

"It hurt," Warren says, "but I'm more concerned about what's going to happen now with the PBGC."

The White House and Congress hope to stabilize the pension system by passing legislation to tighten funding rules, increase premiums to the PBGC that are paid by firms that offer traditional pension plans, and make it harder for companies to make new promises to workers without funding them.

But there is concern from companies with healthy plans, who argue they should not have to pay to bail out irresponsible businesses. Airlines are lobbying for special treatment, arguing that the United decision has put them at a competitive disadvantage. Lawmakers worry that if they go too far, even fewer companies will offer pensions. And the issue could get tangled up with the debate about overhauling Social Security.

If Congress fails to find a solution, there is an increased chance other troubled firms will shed their plans as United did, and as a string of steel firms have already done. The PBGC has taken over 291 pension plans in the steel and metals industry since 1975, including a rash of closures in the past several years.

The PBGC estimates it faces about $96 billion in possible liabilities from firms with junk-bond credit ratings and a reasonable chance of pension plan termination. Among the biggest risks: about $40 billion in the manufacturing sector and $33 billion in airlines and other transportation companies, telecom and utilities.

"It definitely will affect everybody who has a defined-benefit plan. It won't just be limited to the auto industry," Rania Sedhom, a New York lawyer who specializes in employee benefits, says of the United decision. "Other industries are going to look to the airlines . . . and say we need to do the same."