Little-known agency that insures pensions of 44 million workers braces for recession fallout

WASHINGTON (AP) — The deepening recession spells trouble for a little-known government corporation that insures the pensions of 44 million workers and retirees.

The Pension Benefit Guaranty Corp. already has an $11 billion deficit that seems sure to grow larger as Corporate America suffers through the worst economic crisis since the Great Depression.

With companies reporting shortfalls in their pension funds, it's all but certain that the PBGC will be forced to take over the pension plans of a rising number of bankrupt businesses.

That means more red ink at the corporation before things possibly can improve.

The future financial health of the agency is hard to forecast. It is hinged on interest rates, the length of the recession and the PBGC's own luck in playing the market, where it has billions invested.

The agency has $63 billion in assets. But it is obligated to spend $74 billion on pension benefits in the coming years. The PBGC might have time to rebound, but over the long term it might become insolvent and require a bailout.

"Someday — probably more than 20 years from now — there's a significant chance that somebody is going to have to pay the piper," said former PBGC Director Charles E.F. Millard, a Bush administration appointee who stepped down on Jan. 20 when Barack Obama became president. "In the near- to medium-term, there will be no need for a bailout of PBGC."

The PBGC quietly operates in a brick office building a few blocks from the White House. Its fate is important to the workers covered by the more than 29,000 employer-sponsored benefit pension plans it insures, and to all taxpayers who could be asked to foot the bill if its financial picture worsens down the road.

Congress created the PBGC in 1974 to guarantee the retirement security of workers covered by defined benefit pension plans. These traditional plans, which pay a specified monthly benefit at retirement, are being phased out as companies turn to 401(k)-style programs that require workers to make contributions and shoulder investment risks. The PBGC, which receives no tax dollars, gets its money from premiums paid by companies that sponsor the pension plans, along with revenue from its investments.

The corporation's balance sheet has taken heavy hits in recent years. Nine of the 10 largest pension plan terminations in PBGC's history, including United Airlines, Bethlehem Steel and Kaiser Aluminum, have occurred since 2001.

When a plan is terminated, the PGBC takes over and pays benefits to the retired workers. But they might not get the full amount that their employer promised. The maximum guaranteed amount currently is $54,000 a year for a person retiring at age 65.

Some pension experts shrug their shoulders at the PBGC's $11 billion deficit, noting that the 35-year-old corporation has been operating at a deficit for most of its existence. They say the PBGC has many years to recoup its losses and fulfill its obligations to pensioners.

"Every time the economy bounces around, everybody acts like everything is going to collapse and that they should worry about the PBGC, and then things come back," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.

Others who pore over the PBGC annual reports predict a bailout is inevitable.

"Barring some absolutely phenomenal gains in the market or what PBGC's new or future investment strategy comes up with, the PBGC will need taxpayer money at some point in time," said David John, a pensions expert at the conservative Heritage Foundation.

For now, the PBGC, which is awaiting a new boss, will remain on the Government Accountability Office's "high risk" watch list for the seventh consecutive year because of worries that the economic crisis could mean more pension plan terminations and swell the PBGC's deficit.

Taking over the pension plan of General Motors Corp., which just announced it will cut 10,000 salaried jobs, would more than double the PBGC's current $11 billion deficit. But the PBGC also would inherit substantial assets from the automaker's pension fund.

Companies that have underfunded pension plans, but are otherwise on solid financial footing, pose little risk for the PBGC. It's the companies in danger of going under that present the biggest threat. But declines in the market have left corporate pension plans severely underfunded — to the tune of $409 billion, according to Mercer, a global consulting firm.

The underfunding trend is likely to continue. Even though Congress passed a law in 2006 requiring companies to meet target dates to eventually fund 100 percent of their pension obligations, those restrictions were relaxed in December to help them weather the bad economic times.

The business community is lobbying to further waive the rules during the current economic slump. Because of plummeting asset values, companies this year are faced with having to contribute to their pension funds two to three times what they had expected, said Aliya Wong, director of pension policy at the U.S. Chamber of Commerce.

"Because this is coming out of the bottom line, companies are making decisions not just about freezing their pension plans but whether they can even continue in business," Wong said.

The PBGC successfully shaved nearly $3 billion off its deficit in the 2008 budget year, which ended Sept. 30, primarily because 13 auto parts makers reorganized and didn't dump their pension liabilities on the institution.

Those gains were recorded before the market tanked. Still, Millard insists that a new investment strategy, which allows the PBGC in invest more aggressively in stocks and alternative investments, makes it less likely that it will need a multibillion-dollar congressional bailout.

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On the Net:

Pension Benefit Guaranty Corp.: http://www.pbgc.gov/