Pension plan assets kept in 'weak' banks may lose most FDIC protection PERSONAL FINANCE


November 22, 1992|By JANE BRYANT QUINN | JANE BRYANT QUINN,1992, Washington Post Writers Group

WASHINGTON — New York -- If you're covered by a company pension plan, get ready for a shock. Any money that plan keeps in a bank or S&L may soon lose most of its protection under federal deposit insurance.

Big and small companies need to check this out immediately. Workers should show this column to their employers. If your company does indeed bank some of its pension-plan money, ask for written assurance that those funds remain federally insured.

This startling new risk arises from the Federal Deposit Insurance Corporation Improvement Act, whose provisions started taking effect a year ago. Congress' intent was to lower the drain on the federal deposit insurance fund by encouraging customers not to deal with unsound banks.

In the past, if your company invested pension assets in a bank's certificates of deposit, every person in the plan was individually protected by $100,000 worth of deposit insurance. A 15-person plan would be insured for $1.5 million. But starting Dec. 19, this protection will be granted only to pension plans that are kept in strong and well-capitalized banks.

If your plan is kept in a weak bank that fails, the FDIC will pay only $100,000 total, no matter how many employees are covered. The rest of the plan is uninsured, and could lose a lot of money. The company may be liable for the loss, but that's not a sure thing. Both employer and employee are at risk.

Formerly, even uninsured deposits were generally covered, when a foundering bank was bought by another institution. From 1988 through 1991, uninsured deposits were rescued 85 percent of the time. But under the new law so far, uninsured deposits have been rescued only 46 percent of the time. So it's more likely a bank failure will wipe out some pension-plan deposits, too.

What's a "weak" institution under this law?

The full explanation is far too lengthy for this space, but I'll give you the technical definition, provided by FDIC attorney Claude Rollin: A weak bank has "either a total risk-based capital ratio of 8 percent or less; or a Tier I risk-based capital ratio of 4 percent or less; or a leverage capital ratio of 4 percent or less."

Here's the million-dollar question: How does a company find out whether its bank fails one of those three government-devised tests? Turns out, that's not easy.

You can turn the problem over to the adviser who administers your pension plan, and ask him or her to calculate the ratios from the bank's financial statement. But the adviser has to know how. "The risk-based numbers are anything but easy to calculate," Rollin says. "The easiest thing to go for is the leverage capital ratio." But, he adds, the leverage ratio could be high, while one of the other ratios is low. So knowing just one ratio isn't enough.

Another option is to ask your attorney to write to the bank's attorney, asking for official confirmation of the bank's capital status. By Nov. 16, the FDIC will have mailed preliminary notification to the banks that are undercapitalized or worse, stating what their three ratios appear to be.

The banks aren't required by law to disclose them to customers, but they should voluntarily if asked, Rollin says.

Still, on a matter of this importance, should a pension plan rely on a bank's word? If it's wrong, and the bank fails, the employer may be liable for the loss. Furthermore, you'll need to check on the bank's capital status every quarter, lest it fall into the "weak" category without your knowledge.

At present, the FDIC isn't disclosing the capital status of weak banks, for fear of causing runs. Yet the very reason the law was changed was to discipline bad banks by pushing customers to leave.

As matters stand now, savvy companies will move their pension plans to stronger banks, while those that didn't get the message may suffer a devastating loss. Rollin says that the FDIC is having internal discussions as to whether capital ratios will be released. The answer should be yes.

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