Pension plan protector could see more trouble
Experts warn that the Pension Benefit Guaranty Corp. could one day need a government bailout.
Detroit Free Press
As the Detroit Three wrestle with survival, the odds are good that the federal agency that protects pension plans at auto companies and elsewhere could one day need billions in taxpayer dollars to bail it out, too.
The Pension Benefit Guaranty Corp. was already in the hole before the stock market meltdown and the credit freeze shut down U.S. economic growth this fall.
More public companies are expected to file for bankruptcy next year. And who knows how many pension plans will fail?
“There’s tremendous uncertainty as to what the PBGC might get hit with,” said Frank Todisco, senior pension fellow for the American Academy of Actuaries in Washington.
Disaster is not right around the corner. So, retirees don’t need to worry if they’re collecting a pension check from long-gone companies.
Ultimately, though, the PBGC could see more troubles.
“It’s hard to imagine how the PBGC could get out of this in the long run without a taxpayer bailout,” said Jeffrey R. Brown, finance professor at the University of Illinois.
Brown estimates that an additional $50 billion to $100 billion or more of taxpayer money might be needed in the next decade or later to bail out the PBGC.
The agency reported a shortfall of $10.7 billion for single-employer plans for the fiscal year ending Sept. 30. The deficit for multiemployer plans was $473 million.
On the bright side, the numbers are better than deficits in the previous year.
The pension agency cautions against reading the worst into the numbers, noting that it has more than enough assets in hand to cover current obligations. Other pension experts agree.
“It’s not in an immediate cash-flow crisis like General Motors” is facing, said Andrew Stumpff, a lecturer at the University of Michigan Law School and attorney with Stevenson Keppelman Associates in Ann Arbor.
Yet, experts warn, the PBGC could one day need something like the government’s bailout of mortgage giants Fannie Mae and Freddie Mac.
Eric J. Selle, auto analyst for J.P. Morgan, wrote this month that one benefit of providing government loans to the automakers may be avoiding unintended consequences that could accompany a bankruptcy filing by the Detroit Three.
He said that the PBGC could inherit more than $100 billion of pension obligations if Ford or GM filed for bankruptcy and the pension funds were turned over to the agency.
No one knows what kind of liabilities the PBGC could — or even would — get in such a scenario.
GM has reported that its salaried pension plan is overfunded and its hourly plan is 99 percent to 100 percent funded, said Julie Gibson, a GM spokeswoman.
At Chrysler, the expectation is that benefits would continue to be paid.
“Despite adverse asset returns this year, we expect Chrysler’s pension plans to be nearly fully funded and have ample liquidity to continue benefit payments as required,” said Chrysler spokesman Michael Palese in an e-mail Friday.
Ford Motor Co. noted in its report for members of Congress this month that the automaker provides retirement benefits to 207,000 UAW retirees and 128,000 salaried retirees.
“At the end of 2007, our hourly and salaried pension plans were funded at levels of 104 percent and 111 percent, respectively, with combined assets of $45.8 billion,” according to the Ford report.
Ford noted, though, that stock market declines have resulted in a “significant, unexpected reduction in the funded status of U.S. pension plans.”
Without an improvement in market conditions, Ford expects that it would be required to begin making contributions totaling about $3 billion to $4 billion to its major U.S. pension plans. Contributions would begin in 2010 and take place over several years.
Ford said that if pension investment returns do not recover — or continue to deteriorate — “government loans could be used to ensure the overall strong funding status of our pension plans.”
However, Joshua D. Rauh, associate professor of finance at the University of Chicago Booth School of Business, has argued that it’s impossible to know the exact government liability of any potential bankruptcy at the automakers.