New York -- How safe is your company pension? As safe as (1) your company and (2) the federally chartered Pension Benefit Guaranty Corp. The PBGC covers your monthly retirement checks if your pension plan goes broke.
With so many other insurance plans in trouble, it's a pleasure to report that -- right now -- the PBGC is flush. Enough money should be coming in to pay pensioners for years to come.
But as the PBGC is currently structured, it may not last for the lifetimes of the people who depend on it. Executive Director James Lockhart says, "It's building a long-term unsound insurance policy that will come home to roost."
A recent decision from a New York federal court underlines this weakness. In a case involving the bankrupt LTV Corp., the court has stopped the PBGC from stepping into failed companies to collect as much money as Congress originally envisioned.
If that ruling stands, and influences other courts, it will cost the pension-insurance fund billions of dollars. It might even cause the insurance fund to start running in the red before the end of the century, Lockhart says.
According to federal pension law, when a company fails and its pension plan is underfunded, the PBGC can make certain claims on the company's assets ahead of other creditors. That helps the insurance fund collect extra money to pay pensioners. But the pension law conflicts with the U.S. Bankruptcy Code, which says nothing about special treatment for the PBGC.
Some courts have allowed the PBGC a favored position. But the New York court ruled that the PBGC is entitled to no more than any other unsecured creditor. The PBGC will appeal, as well as ask Congress for a quick change in law. Over the years, Congress has made several changes in the PBGC's funding, in order to put the insurance plan on a sounder footing.
Speaking for the failed companies, Washington attorney Michael Gordon objects to giving the PBGC a prior claim on assets. If that happens, he says, troubled companies will find it harder to get the credit they need to reorganize. If the PBGC needs more money, he says, then it should raise the premiums it charges companies for their pension insurance -- especially companies in risky industries.
One way or another, Congress needs to make repairs. Otherwise, we may be wringing our hands 10 years from now, debating a federal bailout of pension insurance and wondering what went so badly wrong.
The PBGC is funded by the companies whose employees are insured (with the U.S. Treasury providing a $100 million backup fund). At present, it makes payments to 125,000 retirees --
refugees from 1,568 failed plans. Another 130,000 workers are definitely due benefits when they retire. By year-end, an additional 88,000 people will probably have been left on the PBGC's doorstep (not yet counting the 40,000 from LTV).
fTC You are covered by the PBGC only if you receive a "defined-benefit" pension. That's a lifetime income, based on your salary and years of service. You're not covered for money received from a profit-sharing plan, insurance annuity or 401(k) retirement-savings plan.
This year, a single 65-year-old in a defined-benefit plan is covered for up to $2,250 a month. That's the maximum the PBGC would pay if your company failed and lacked enough money to continue your pension. If you retire at an earlier age, or your pension covers both you and your spouse, the maximum payment would be reduced. (Payments covering two lives are always smaller because the available money has to be stretched over several more years.)
The PBGC's fundamental funding problem is that it's not collecting premiums from insured companies at a fast enough rate to cover its projected expenses in the next century. At the same time, some weak companies are deliberately saving money by underfunding their pension plans.
When weak companies go bankrupt with an underfunded pension plan, they dump their workers and pensioners onto the insurance fund. The cost is ultimately borne by the stronger companies. At the end of last year, the long-term deficit stood at $1.9 billion, almost double that of the previous year. Last year, the number of people owed benefits climbed by nearly 50 percent.
All observers of the PBGC stress that it can meet its current obligations. No "run" will develop on the fund because pensioners can't withdraw their money in lump sums, says Dallas Salisbury, president of the Employee Benefits Research Institute.
But now is the time to solve the PBGC's problems -- not 10 years from now, when it might be too late.