Airline Troubles Pinch Pension Insurance Fund

Agency chief calls for better pension funding, priority in bankruptcies. MOUNTING RISKS

SEVERAL airlines have come in for hard landings recently, and one of the most jolted passengers has been the federal agency that insures corporate pension funds for 40 million United States workers. In the last year, the Pension Benefit Guaranty Corporation's liabilities jumped from $4.2 billion to $5.1 billion, bringing the agency's net-worth deficit to $1.8 billion, according to the agency's annual report Wednesday.

This does not mean another savings-and-loan style taxpayer bailout is around the bend, according to James Lockhart, the PBGC's executive director. But he says steps are needed to reduce exposure.

``The program is not structured yet as a sound insurance program,'' Mr. Lockhart says. Started in 1974, the PBGC is funded by corporate premiums.

In October, the agency took over seven Eastern Airlines pension programs, underfunded by $700 million. This comes on top of the agency's $5.1 billion in liabilities as of the fiscal year ending in September.

An agreement between the PBGC and Continental Airlines Holdings - the former parent of Eastern - to fund the plans is now snarled in Continental's own bankruptcy proceedings.

Meanwhile, Pan Am Corporation entered bankruptcy in January, leaving the agency with contingent claims on $621 million in underfunded insured benefits. If the pension plans are terminated, the PBGC would cover the shortfall.

Trans World Airlines Inc., with cash-flow problems of its own, has pension underfunding of $132 million.

There is some good news for the insurer:

For now, the fund is able to meet its commitments, aided by a January 1991 increase in premiums. Unlike depositors in failed S&Ls, PBGC beneficiaries are paid over many years.

Most of the nation's insured pensions are healthy, with a total of $1 trillion in assets to cover $800 billion in liabilities.

This week, in a tentative deal with the PBGC, the LTV Corporation agreed to a 30-year plan to fund its pensions, which now fall short by $3.1 billion. The steelmaker may then emerge from five years in bankruptcy.

The deal follows legal victory last June, when the US Supreme Court upheld the PBGC's right to require LTV to resume funding its pensions when the company's ability to pay improved.

Still, Lockhart says the agency needs shoring up, and he is working with the Bush administration on legislation expected this spring. There are basically three possible approaches:

1. Improve funding levels in the insured plans.

2. Add to the insurance fund.

3. Reduce the agency's potential liabilities. The agency wants higher status in bankruptcy cases.

To bring pension plans up to full funding, companies often spread the cost over a period of about 18 years. But sometimes a fund runs dry even as the company is making it's legally required payments. The PBGC is looking at ways to link funding contributions to the expected outflow from the fund.

In addition, Lockhart says companies should have less latitude in projecting the interest rates at which their pension funds will earn money. Under current rules, he says, one company might predict interest rates to be 2 percent higher than another does, and the first company might then contribute 20 percent less to its fund.

To businessmen such as Art Kent, a spokesman for Continental, the PBGC uses ``dramatically conservative actuarial computations.'' He says the Eastern Airlines shortfall could wind up being as low as $235 million.

The National Association of Manufacturers criticized the PBGC this week when the agency released a list of 50 companies with the largest underfunded pension plans. The underfunding totaled $14 billion.

``The list can cause unnecessary fear and concern in the ranks of employees,'' says Christopher Bowlin, a benefits specialist with the manufacturers association.

Levels of underfunding indicate PBGC's exposure, but say little about the health of the company that runs the plan.

Mr. Bowlin says many of the underfundings on the recent list result from negotiated benefit increases. Underfunding may also occur when many people withdraw benefits in lump sums.

Still, Lockhart says PBGC faces $8 billion in ``reasonably possible losses.''

Lockhart says the PBGC is not seeking to increase its premiums this year. But he says that, despite recent changes, PBGC liabilities are still being covered too much by fixed annual premiums (now $19 per participant in a plan), and not enough by risk-based premiums ($9 per $1,000 of unfunded vested benefits, capped at $53 per participant).

Jack VanDerhei, a professor of risk management and insurance at Temple University in Philadelphia, says the agency should consider premiums ``pinpointing those plans that are quite likely to come in as PBGC hits.''

You've read  of  free articles. Subscribe to continue.
QR Code to Airline Troubles Pinch Pension Insurance Fund
Read this article in
https://www.csmonitor.com/1991/0301/fpen.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe