IE 11 is not supported. For an optimal experience visit our site on another browser.

How safe is your pension?

More than 40 million Americans are depending on a little-known federal agency to protect their pensions if recession-wracked companies go belly up and can’t pay.
/ Source:

More than 40 million Americans are depending on a little-known federal agency to protect their pensions if recession-wracked companies go belly up and can’t pay retirees what they’ve been promised. The Pension Benefit Guaranty Corporation is the backstop in the event firms can’t pay benefits to retirees. With many corporations sure to report under-funded pension plans by the end of this year, the PBGC is looming larger in importance as the protector of workers and retirees.

ALTHOUGH 401(k) plans have supplanted many traditional pensions in recent years, about 20 percent of the population still relies on traditional pension plans, called “defined benefit” plans because they pay a specific monthly amount to the retiree.


In a 401(k) plan, the employee assumes the risk by investing some of each paycheck in a portfolio of stocks or bonds.

But in a traditional pension plan the employer assumes the risk, promising that when employees retire, they will get a fixed benefit.

Unlike 401(k) accounts, pensions are protected by the PBGC. If a pension plan is terminated because the employer falls into financial ruin, the PBGC assumes responsibility for paying some benefits.

This year, the maximum annual benefit that the PBGC will pay to beneficiaries of the plans it has taken over is $42,954 per pensioner. Last year, the agency paid out more than $1 billion to beneficiaries of the nearly 3,000 plans it administers.


As the insurer of last resort for corporate pension plans, the PBGC operates on an insurance company model. Corporations pay premiums to the agency, and the PBGC bets that in any given year only a few firms will become insolvent and be unable to meet their pension obligations. When that happens, the premiums help cover the pension obligations.

But the PBGC also gets the portfolio of the defunct pension plans.

In fiscal 2001, which ended Sept. 30, the PBGC collected $845 million in premium payments.

Exactly when the PBGC takes over a faltering pension plan varies from case to case, but generally the agency steps in when a company is about to go under and its pension plan assets look insufficient.

“We are talking about cases where a company is liquidating and there’s no one left to administer the pension plan,” PBGC spokesman Randy Clerihue said.

The agency invests all of the premiums in Treasury bonds. Of its $21 billion in assets in 2001, $13.8 billion was invested in Treasuries, while $6.2 billion was invested in stocks and the remainder in real estate and other assets.

The PBGC contracts with private sector firms such as Wellington Management to run its portfolio.

In a worst-case scenario, if a slew of big corporations were to go belly up all at once and the PBGC were forced to take on their pension plan liabilities, the agency itself might be hard pressed to pay out benefits.

The General Accounting Office, Congress’s auditing watch-dog, warned of this possibility four years ago, saying PBGC “could eventually run out of assets” and Congress would need to step in and spend taxpayer money to cover benefit payments.

Paul Kasriel, director of economic research for the financial services company Northern Trust, recently raised the specter of a new taxpayer bail-out of PBGC along the lines of the savings-and- loan fiasco of the 1980s and early 1990s.

Clerihue said the agency “is not close” to that point. “It would be pretty far in the future that we’d need to do that, if we ever did.”

Part of the problem PBGC faces is that the companies paying premiums are not a cross-section of corporate America. Firms that still have defined benefit plans tend to be in older, industrial sectors such as steel and auto manufacturing.

“The financing (of PBGC) is not as diversified” as it would be if all firms were paying premiums, said John Scott, director of retirement policy at the American Benefits Council, a business-supported advocacy group. “The potential growth and potential stability is a lot less. The defined-benefits world is not expanding.” All in all, Scott said, “it’s a cause of concern for the future.”


But what about the short run? If you’re collecting a pension, how concerned should you be when you hear the words “under-funded pension plan”?

When a pension is under-funded, it means that the market value of the plan’s assets is less than the “projected benefit obligation,” that is the total amount of payments promised to the people who are covered by the plan.

A pension plan can be under-funded one year, then over-funded the next, as its investments fluctuate in value. What matters is not one year’s performance, but the long-run viability of the fund.

Adrian Redlich, an analyst for Merrill Lynch, who recently completed a study of the 346 companies in the Standard & Poors 500 who have defined-benefit plans, found that at the end of 2001 such plans were over-funded by $1.1 billion, a decline of more than $200 billion from the previous year.

Redlich says that once firms report the status of their pension plans later this year, “there will be a massive swing — they’re going to be under-funded.”

He estimates that for the 346 companies he studied, which together have pension assets of $1 trillion, they could be under-funded by an aggregate of $200 billion by the end of 2002.

The federal law that regulates pensions, known by the acronym ERISA, sets the minimum amounts that employers must contribute in order to keep their plans viable.

Since the Corporation began operating in 1975, 60 percent of the claims made on it by failed companies have come from the steel and airline industries.

And in the current slow-down, it is companies in those same two troubled industries that are likely to be cause for PBGC concern.

Old-line industrial firms have shrunken profitability, yet relatively big populations of retirees, dating from the days decades ago when they were dominant. At U.S Steel, for example, there are six retirees’ and dependents for every active worker on the payroll.

Two weeks ago U.S. Steel warned in its quarterly filing to the Securities and Exchange Commission that the decline in the value of the stock holdings in its pension plan “will likely have an impact on future funding needs” of the plan.

Hearing this, Goldman Sachs warned investors that “continued weakness in the equity (stock) markets” and the resulting pension underfunding “could require (U.S. Steel) to make significant cash contributions to its pension plan.” And, of course, every dollar used to replenish its pension fund is a dollar that’s not available for paying dividends or investing in new ventures.

U.S. Steel’s predicament “demonstrates the vulnerability of defined benefit plans and underscores why we like companies with defined contribution plans,” the investment house said.

Defined benefit plans haven’t gone completely out of style yet, but before they do, they may cause retirees and taxpayers a good bit of anxiety.

For more information on pension plans and protections for retirees, visit the U.S. Department of Labor’s web site.