Pension funds pinched, stirring calls for reform

Millions of Americans, retired or getting close to it, now face questions about the health of their pension plans.

Large companies from IBM to General Motors Corp. are struggling to meet their obligations to retirees.

The reasons, in the view of experts, range from poor planning to a deep and surprisingly long bear market in stocks - in which pension funds invest.

Whatever the cause, a rainy day has arrived, and many companies are not prepared. Consider: Of the companies in the Standard & Poor's 500 index, 353 offer traditional pension plans, as opposed to voluntary savings plans for employees such as 401(k)s. Of those firms, at least 322 pension plans were underfunded as of mid-June. The total shortfall: $226 billion, despite this year's nascent stock market recovery.

Congress, among others, is taking note. Thursday, the House Education and the Workforce committee plans to consider ways to strengthen America's pension system and the federal agency that guarantees corporate plans.

The challenge represents a long-term threat more than an immediate crisis. An "underfunded" pension plan generally succeeds in paying retirees, even as the company scrambles to rebuild the fund to meet its long-term obligations.

But the sharp turnaround in corporate fortunes is worrisome, both at specific companies and in aggregate.

General Motors, for example, recently had to issue a stunning $13 billion in debt to bolster its pension plan. Such debts could make it harder to compete in the no-money-down world of automobiles.

"There's no way General Motors can eliminate all its deficit by selling cars," says Alicia Munnell, an expert at Boston College, noting that GM's pension funded is underfunded by $19.2 billion.

As recently as 2001 - and for all of the 1990s - the pension funds of the S&P 500 firms, taken as a whole, were fully funded. In 1999, their surplus exceeded $200 billion - as big as today's shortfall.

The reversal highlights a crucial factor in pension-fund success: investment rates of return. The bear market has shrunk the value of their corporate pension funds - overall, by nearly $1 trillion, leaving about $3.69 trillion in assets at the end of 2002.

While some experts urge far-reaching changes in the corporate pension system, most expect Congress to focus for now on more temporary measures, such as allowing companies to forecast a higher rate of return on their investments.

"It's all piecemeal, patchwork, finger-in-the-dike measures," complains A. James Norby, president of the National Retiree Legislative Network, a group representing millions of retirees of major firms.

The Pension Benefit Guaranty Corp., which insures the traditional "defined benefit" pensions of 44 million Americans, has seen such a deterioration in its long-term financial position in the last year or so that the General Accounting Office recently put the PBGC on its "high-risk" list of government programs. Companies with so-called defined-benefit pension programs fund the PBGC with annual contributions. In a worst-case scenario, a spate of corporate bankruptcies could leave taxpayers to foot the bill for keeping pensions flowing to many retirees.

Under present law, if a plan is less than 90 percent funded to cover its pension liabilities, the sponsoring firm must make additional contributions to the plan to reduce the funding deficiency within three to five years. (There are exceptions.)

Last April, Reps. Rob Portman (R) of Ohio and Benjamin Cardin (D) of Maryland, Introduced a bill in the House they said would strengthen private pensions and help corporations bridge their gaps.

Some economists are concerned that companies putting more money into their pension plans will have less money for spending on new plant and equipment - thus damaging the economic recovery.

To avoid this problem, the Portman-Cardin bill would change the way pension liabilities are calculated. Since 1987, federal law has required that pension liabilities, which determine minimum pension contributions, be computed using the interest rate on the 30-year Treasury bond - a bond no longer issued.

When that interest rate fell sharply, it shrank the assumed future income of pension funds, and so funding requirements grew. Last year, Congress passed a bill temporarily boosting the rate to provide companies funding relief. That provision expires at the end of 2003. So the Portman-Cardin bill would phase in a higher rate based on long-term corporate bond returns. If that bill dies in Congress, experts foresee a separate bill will be introduced setting a higher rate.

"This almost has to happen," says a congressional staffer.

David Certner, federal affairs director for the AARP, a powerful membership group of older Americans, objects to a higher rate if it applies to the lump-sum payments that some companies allow retirees to take instead of a pension. A payment of $100,000 for a 45-year-old could shrink to $75,000 with a 1 percent higher rate, Mr. Certner notes. About half of corporate defined-benefit plans permit lump-sum payouts.

Some firms with underfunded pension funds fear that a run of concerned employees seeking lump-sum payments will deplete their fund quickly, creating a severe financial burden for the firm.

Norby wants Congress to tackle the long-term funding problems of defined-benefit plans. Portman-Cardin, he charges, masks "the real problem" of pension underfunding.

Further, the bill includes tax provisions to boost personal savings, but costing Uncle Sam revenues. Those provisions are controversial, but Mr. Cardin, in a telephone interview, calls the $50 billion cost "within the range we think is responsible."