Until Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, a worker often could not collect a pension if his employer went out of business.
Since then the Pension Benefit Guarantee Corporation (PBGC), a government agency, has insured private pensions so that workers don't lose their retirement income if their employer goes bankrupt. But now the agency is facing a variety of serious problems including:
* A shortfall in funds needed to pay for pension benefits it is already obligated to pay.
* The threat that a number of financially ailing companies may go out of business, forcing the agency to raise huge additional sums.
* Signs that a growing number of companies that are not going bankrupt will use a loophole in the pension law to dump big pension obligations on the agency.
Legislation to correct these problems is pending in Congress. But action is not expected until a new Congress convenes in January. ''Chances of action before then are slim, I'm afraid,'' says Edwin M. Jones, the agency's executive director.
Even critics of the agency are quick to admit that the 39,000 individuals whose pensions it is paying do not have to worry about their monthly checks.
''The PBGC does have adequate assets on hand to meet all of its obligations short term,'' says George Pantos, counsel for the ERISA Industry Committee, a group of more than 100 major corporations that want to see federal pension law changed.
Still, the agency estimates that the pensions it has been forced to pick up have a current value of $236 million more than it has collected in insurance premiums from employers with so-called defined-benefit plans, the type the agency insures. Under a defined-benefit plan, a company promises to pay workers a fixed benefit in retirement. Some 36 million workers are covered by such plans.
There are two key reasons the agency's premiums have not covered the pension benefits it has had to absorb. One is the recesssion. More companies are closing their doors and thus ending pension plans. And those plans that are terminating have a greater gap between the funds they have set aside and the amount employees have been promised.
For example, the average plan that terminated in 1977 created a claim on the Pension Benefit Guarantee Corporation of $24.7 million. By contrast, claims have been averaging $62.3 million in the past four years and are estimated to climb to an annual average of $96.8 million during the period 1983-86.
To close this money gap, the agency is asking Congress to raise the annual insurance premium companies pay, from the current $2.60 per participant to $6. That would cover the cost of projected new benefit claims and would pay off, by the end of 1987, the $236 million existing deficit.
The agency has been criticized for the size of the premium increase it wants. One key objection is that it plans to pay off its unfunded liabilities over a five-year period. But federal law says that companies can take at least 10 years for this.
''What you are talking about is reducing the dollars available for benefits in sound plans to bail out benefits for those whose employers were not as responsible. The question is whether or not it is appropriate to have that fast a funding plan,'' says Dallas L. Salisbury, executive director of the Employee Benefit Research Institute, a think tank specializing in pension issues.
The proposed premium increase would not set aside any extra funds to provide the money the pension agency would need if a large company, like International Harvester, went bankrupt and the agency was forced to pick up its unfunded pension liabilities, which exceed $500 million.
According to the PBGC, the companies with the 50 largest unfunded liabilities have promised employees pensions with a current value of $15 billion more than the companies have set aside. The smaller unfunded liabilities of other publicly held firms total $5 billion. As a result, the agency admits that its loss exposure is at least 250 times the claims rate it has been experiencing.
Even more worrisome, the agency has identified some 34 financially troubled companies which have an estimated $4.4 billion in unfunded pension liabilities. It has not established a contingency fund, because ''the law requires us to set the premium at the lowest level possible,'' Mr. Jones explains. And since even pension plans with large unfunded liabilities have some cash, ''therefore we think we have time to deal with any situation when it comes in.
''While losses due to a major corporate bankruptcy are beyond the agency's control, it is moving to close a loophole in the pension law which has allowed some companies to shift their pension burden onto the agency while staying in business.
That is done by terminating the pension plan. Under law, a company can walk away from its pension plan if it pays to the government agency 30 percent of its net worth. Such a termination is attractive when the unfunded liability exceeds 30 percent of a company's net worth. The pension agency has identified 57 companies with the economic incentive to terminate their plans. The total unfunded vested liabilities for them is $8.8 billion.
For instance, a company with $100 million of net worth and $50 million in unfunded pension liabilities could theoretically borrow $30 million to pay off the agency and be $20 million ahead. The lower the company's net worth, the more attractive the strategy is. Or consider the case of AlloyTek Inc., a producer of jet engine components, which closed its pension fund in late 1979 when the company had no net worth and its pension plan had unfunded liabilities of $4.5 million. As a result, after a battle the PBGC ended up assuming most of those liabilities, even though the company remains in business.
Another version of this tactic is for a company to spin off a division with large unfunded liabilities and then for the new owner to end the pension plan and place the liabilities at the pension agency's doorstep.
Legislation proposed by US Sen. Don Nickles (R) of Oklahoma and Rep. John N. Erlenborn (R) of Illinois would close these loopholes. A company that terminated an underfunded pension plan but stayed in business would have to pay off the underfunding completely over a period of years. And the bill would also make a corporate parent liable for the unfunded liabilities of units it spun off for up to 15 years.
Ironically, even considering changes in the pension law may prompt some companies to shed pension liabilities. ''As more employers become aware of the change in the law being contemplated, there will be more firms inclined to take advantage of the remaining time before the law changes,'' says Mr. Salisbury of the Employee Benefit Research Institute.