THE government insurance program for private-company pensions could require another savings-and-loan style taxpayer bailout, some analysts warn. Others say such concerns are overblown.
The issue captured attention last week as James Lockhart, former executive director of the Pension Benefit Guaranty Corporation (PBGC), warned Congress that the agency faces losses of up to $13 billion in the next few years.
Then the Congressional Budget Office warned that if the financial imbalance is addressed by raising premiums, many companies may leave the insurance pool. Hence the "taxpayer bailout" talk.
Many outside experts say that, although regulatory changes are clearly needed, the situation is not so bleak.
"Let's keep it in the proper perspective," says Ray Adams, chief financial officer of Oregon Steel Inc. "If the PBGC would raise its premiums 100 percent, it would still be a very small number."
Currently Oregon Steel and other employers pay $19 annually to the PBGC for each worker covered by their pension plans. If a company underfunds its pension and then enters bankruptcy or goes out of business, the agency can be left holding the bag.
"The press has really bought Lockhart's" view "hook, line, and sinker," says Karen Ferguson, director of the Pension Rights Center in Washington, which represents worker and retiree rights. "The degree of hype has been extraordinary."
The PBGC can expect to receive $8 billion in premiums over the next 10 years, even without a premium increase, notes Paul Jackson, a Washington actuary and former manager of the Wyatt Company, a benefits consultancy. Losses could be smaller or larger than $13 billion, depending on how well the economy does.
The agency has $5.6 billion in assets. This is insufficient in actuarial terms to cover its long-term obligations to retirees. The asset shortfall is placed at $2.5 billion. `Willing to rally'
"I don't think we're going to be in a situation for a taxpayer bailout," adds Lynn Dudley, director of retirement policy for the Association of Private Pension and Welfare Plans in Washington.
Any such bailout would require a change in the law under which the PBGC was founded, which includes no federal liability.
"Employers are willing to rally around other employers" whose pension plans are in trouble, Ms. Dudley says. But "we don't think that healthier companies should have to bear more and more and more burdens" because other companies have poorly managed their pension funds.
That's where the proposed reforms come in. The pension-insurance agency wants to:
* Tighten funding rules so that companies with underfunded pension plans must fill the gap over a period of 10 or 20 years instead of 30.
* Limit its coverage of future benefit increases; additional benefits would be insured only if a plan is fully funded.
* Gain higher status for its claims in bankruptcy proceedings.
The PBGC has 85,000 pension programs under its wing, covering 40 million people. Most of the plans are fully funded. As a group, they have assets of about $1.3 trillion to cover vested benefits of $900 billion.
Underfunded plans have a combined shortfall of $51 billion, including $12 billion in financially weak companies.
A troubling sign is that the funding trend is downward: Only 79 percent of the plans have sufficient assets to cover their obligations, down from 93 percent in 1987, according to an October survey by Buck Consultants Inc., benefits advisers. Improvement at Chrysler
Underfunding, however, does not necessarily mean big losses for the PBGC. Chrysler Corporation, for example, has one of the biggest shortfalls, but the carmaker has reduced underfunding to $3.9 billion from $4.4 billion over the last year. And as the company's business prospects have improved it has been able to issue about $2 billion in new stock, with a goodly chunk of the proceeds going to the pension fund.
Similarly LTV Corporation, a long-bankrupt steel company, has resumed responsibility for most of its pensions, although it still has a long way to go to fund them.
The largest losses in the agency's 18-year history have been Pan American World Airways (underfunded by $900 million) and Eastern Airlines ($700 million). The PBGC pays such obligations over a period of decades.
The only shortfall larger than Chrysler's is General Motors Corporation, with underfunding of $12 billion. Numerous other companies in old-line industries such as steel and heavy machinery have funding gaps.
"Prior to 1974," when the PBGC was set up, companies "could go forever" without bringing their plans up to full funding, notes Dallas Salisbury, president of the Employment Benefit Research Institute in Washington.
Underfunded plans are penalized by paying larger premiums, but these "variable-rate" premiums do not make up the PBGC's shortfall, says James Durfee, a vice president of Towers Perrin, a benefits consulting firm.
That's why premiums on all participating companies may have to be increased. Some observers say this will drive companies out of federally insured plans into other pension programs.
"You can't just keep on raising premiums," says Fred Rumack, director of tax and legal services with Buck Consultants.
But Mr. Durfee says "it would take a lot higher PBGC premiums" and other problems to push big companies out.
Mr. Jackson notes that, when the Pension Benefit Guaranty Corporation was founded, it charged premiums of only $1 per employee - a number "pulled out of thin air" because no one knew what was needed.
Jackson calculates that today's premium of $19, adjusted for inflation would have been $7 in 1974. Had the agency charged that amount, he reckons, it would be sitting on a $3 billion surplus today rather than a $2.5 billion deficit. Thus, assuming that Congress simply allows the premium to rise with inflation, "the PBGC is in remarkably good shape."
The recent publicity, he suspects, was needed because "Congress won't act on anything" without pressure from the public.