Company pension plans failing at record rate
By Brian Tumulty
Gannett News Service
BEACHWOOD, Ohio — Retiree Primard Pisano had nothing personally to fear from the plunging stock market that has evaporated a significant portion of many workers' retirement savings.
Gannett News Service
Even though National Acme, the industrial machinery company where he worked for 35 years, is being liquidated in bankruptcy, the 69-year-old former machinist was told last week he'll keep getting his $550-a-month pension check.
Primard Pisano, 69, of Madison, Ohio, listened as officials of the federal Pension Benefit Guaranty Corp. addressed retirees Tuesday in Beachwood, Ohio. The retirees belong to a pension plan formerly operated by the National Acme Co. of Cleveland. Because of financial troubles at the company, the program has been taken over by the PBGC, a federal agency that guarantees pension plans.
It's federally insured.
"Somebody has to look out for the American workers," Pisano said during a meeting held in a suburban Cleveland hotel by officials of the federal Pension Benefit Guaranty Corp. to acquaint the retirees with their new pension plan manager — Uncle Sam. "We lost everything we had with health insurance, and now all we have is a pension."
An estimated 200,000 workers and retirees — a record number — will have their pension plans taken over by the federal government this year because their companies went bankrupt or out of business or abandoned their pension plan for other reasons.
The PBGC estimates it may take over another 220,000 pensions in the fiscal year starting Oct. 1, based on what's happening at six large companies, unidentified except that they are mostly in the steel and airline industries.
The biggest downside for many, like Pisano, is that they have lost their employer-sponsored health benefits, prescription drug coverage and life insurance. Steelworkers, who have dominated the recent pension plan terminations, often lose additional severance benefits covering union-negotiated shutdown pay and early retirement subsidies.
In some cases, retirees will get a smaller pension check than the company promised, but on average, payments are 94 percent of what they would have been.
These workers are in considerably better shape than those with self-directed retirement savings accounts such as 401(k) plans, which are not insured. They have been rocked by the stock market's nearly three years of losses.
"People don't understand that in a 401(k) plan they are taking all the risk in terms of investment of their account," said David Ray, chairman of the Department of Labor's advisory council on employee welfare and pension benefit plans. "If their investments do poorly and they lose all the money, there is no government program to back them up."
And then there are the 51 percent of American workers who have no employer-sponsored retirement plan at all. Their retirement security net is limited to Social Security and whatever personal savings they may have, possibly an Individual Retirement Account.
Pension legislation working its way through Congress won't change that three-tiered system: people with traditional pensions insured by the government, those with defined-contribution plans subject to market risks, and those without any employer-sponsored retirement savings.
House Democrats unsuccessfully tried to enact a limited form of 401(k) insurance to protect workers against breaches of duty by the pension manager. It would have addressed complaints by workers at Enron who were kept in the dark about the company's financial problems while executives were unloading their stock, but would not have protected workers against overall stock market losses.
Proposals favored by the Bush administration move away from government guarantees such as those offered by the PBGC. The White House wants to carve out part of the payroll tax that now supports the guaranteed benefits of Social Security for workers to use as private investment accounts that would eliminate part of the current safety net and subject it to market risks as well.
The 44 million Americans with traditional pension plans have two retirement safety nets — Social Security and the PBGC.
If the employer goes bankrupt, goes out of business or disappears in a corporate merger, the PBGC guarantees future payments through a multibillion-dollar trust fund financed with insurance premiums paid by all employers that have traditional pensions.
The biggest termination of a pension plan this year — and since the PBGC was established in the 1970s — involved 82,000 employees of LTV Steel. Many of this year's other terminations involve steel manufacturers, other heavy industrial firms and textile manufacturers.
Bethlehem Steel already has warned employees that its pension plan may be terminated and, if it is, it will top the list of failed plans.
Last month, the PBGC filed a motion in the U.S. District Court in Harrisburg, Pa., seeking to terminate the pension plan of Freedom Forge, one of more than 30 steel companies around the country in bankruptcy.
And WorldCom's bankruptcy filing raises questions whether the traditional pension plans serving MCI and other subsidiaries of the telecommunications conglomerate eventually might be terminated and placed in receivership. That's also true at bankrupt Enron, where the Labor Department already has appointed an independent pension benefits manager.
The wave of corporate bankruptcies and pension plan terminations is putting a strain on the resources of the PBGC. By the end of next year, the agency estimates it will be guaranteeing the monthly pensions of more than 1 million Americans, up from 624,000 in 2001.
The federal agency's resources are being drawn down because of the large drain from pension plan terminations and the downturn in its own investments. Its surplus has dropped from $9.7 billion in September 2000 to less than $5 billion at the end of April.
Meanwhile, the prolonged downturn in stock prices also has put pressure on the retirement trust funds of Fortune 100 firms that offer traditional pensions.
A recent report by the insurance risk survey firm Milliman USA found that more than 25 of the nation's biggest companies had pension funding shortfalls. Among the 2001 pension plan shortfalls estimated by Milliman were: General Motors, $9.08 billion; Exxon Mobil, $2.8 billion; UAL (the parent of United Airlines), $2.52 billion; Delphi Automotive Systems, $2.37 billion; United Technologies, $2.33 billion; Pfizer, $2.31 billion and AMR (parent of American Airlines), $1.94 billion.
Overall, underfinanced liabilities of corporate pension funds are estimated at $111 billion, according to Rep. George Miller of California, ranking Democrat on the House Education and Workforce Committee. That's more than four times as high as the $26 billion shortfall of a year ago and is likely to put a huge strain on corporate profits in the coming year as employers shift cash into their pension plans.
"They are required by law to fund these plans when they might prefer to invest in research or marketing or conserving cash," said Dana Muir, an associate professor of business law at the University of Michigan Business School.
That's good news for workers with traditional pensions who have guaranteed benefits, but not to those who are counting on a rebound in corporate profits to fuel a stock market recovery.
National Acme, despite the bankruptcy filed by its parent company, had a fully financed pension plan and well-kept records, according to Suzanne LaPiana, a PBGC official who is serving as the government trustee of the plan. The PBGC hasn't finished reviewing the company's records and won't provide retirees of a final guaranteed benefit until late 2004, but LaPiana said it's probable that the benefits were calculated correctly.
That was good news to retirees like 76-year-old Edgar Phillips of Cleveland, who acknowledged he was nervous about the future of his $533-a-month pension before the meeting held by the PBGC.
"That's how I eat," said Phillips. After he received reassurances that the checks will continue, he said, "I feel much better now. Everything is real clear."
