Washington – Fearing that airlines and other struggling industries could present the country with its next S&L crisis, Congress and the White House are pushing an overhaul of pension-funding rules that has been overshadowed by Social Security.
United Chairman Glenn Tilton, Northwest’s president and chief executive Douglas Steenland, and Delta CEO Gerald Grinstein were called to appear today before the Senate Finance Committee. The committee leaders are alarmed that the Pension Benefit Guaranty Corp. – the federal agency that insures private pension plans – already has a $23.3 billion deficit because of defaults.
More than half of the 100 largest plans had less than their promised benefits on deposit, which the committee’s chairman blames on lax rules that are supposed to guarantee full endowment.
About 34 million people – roughly 20 percent of the nation’s workforce – expect to receive payments from their employers through defined benefit plans.
The risk those workers face was highlighted last month when a federal judge allowed United Airlines to default on $9 billion in pension obligations as it attempts to emerge from bankruptcy. The ruling shifted responsibility for paying benefits for 120,000 current and former workers to the PBGC, but the agency will pay only about two-thirds of promised benefits.
“In addition to allowing plans to book phantom investment gains, United was able to use stale, non-market interest rates to value pension liabilities, thereby further disguising funding deficits. In other words, our pension laws tell these companies, ‘Take off the green eye shades and put on rose-colored glasses,”‘ Sen. Charles Grassley, R-Iowa, said in his opening statement.
The chairman said current law allows corporate deception similar to criminal activity alleged at Enron Corp., adding: “The same blinders that United put on are used by companies everywhere.” The pension funding problem recalls the savings and loan crisis of the 1980s, when hundreds of thrifts became insolvent and were taken over by the government. A congressional study in 1996 put the price tag for the S&L bailout at $480.9 billion.
In January, the Bush administration proposed an overhaul of regulations dating to the 1974 establishment of the Employee Retirement Income Security Act and the PBGC.
Among the changes favored by the White House are a boost in the PBGC premiums paid by employers, as well as a rewrite of rules that have allowed companies to use favorable stock trends and interest rates to conceal underfunding in their plans.
Similar legislation is being drafted in the House by Rep. John Boehner, R-Ohio, who serves as chairman of the House Committee on Education and the Workforce.
Airline pilots in particular are concerned that other airlines may follow United’s lead if they perceive the carrier gaining a competitive advantage by dumping its pension obligation.
“Under current law, the only way an airline can avoid burdensome pension costs is by entering bankruptcy and terminating the plans,” said Duane Woerth, president of the Air Line Pilots Association, in remarks prepared for the hearing.
“But if more and more airlines choose to shed their pension liabilities in bankruptcy, it sets up the potential for the ‘domino effect,’ in which all the other legacy carriers are incentivized, or even forced, to file bankruptcy, in order to achieve the same cost savings and level the playing field,” Woerth said.
One member of the finance committee, Sen. Jim Bunning, R-Ky., complained the government was encouraging corporate mismanagement through its lax rules covering pensions. He was also critical of bailout money provided to the airlines last year that was not spent to bolster pensions but used to pay other debts.
“I want to know why we should reward lousy management,” Bunning said, his voice rising in anger.
One of the panelists, David Walker, head of the Government Accountability Office, replied “I don’t want to reward anything. I think we have some very perverse incentives under the current system.”
