Washington put on pensions alert
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Sunday August 29, 5:00 pm ET
By Caroline Daniel and Dan Roberts in Washington
The federal insurer behind 31,000 US pension plans has warned of "multi-faceted and profound challenges", amid clear signs that concern about retirement costs is moving rapidly up the agenda in Washington.
With the threat of bankruptcies looming in the airline industry, senior White House officials are keeping a close eye on developments. The National Economic Council, headed by Stephen Friedman, is working with the Treasury, where a pensions task force is said to have been created. President George W. Bush is also understood to have raised the issue with Andrew Card, his chief of staff.
According to one senior administration official, the potential crisis could affect 40,000 people in the airline industry alone and lumber the federal government with a $13bn-$15bn charge.
A prime concern is how to save the Pension Benefit Guaranty Corporation, the federal insurer, in the event that United Airlines, the bankrupt carrier, terminates its pensions plans.
Last Wednesday, the IAM machinists union met, at the White House, Charles Blahous, special assistant to the president for economic policy, and Bradford Campbell and John Worth, two Treasury officials. Robert Roach, vice-president of the IAM, told the Financial Times: "The White House is very concerned and are looking at legislative solutions. This is being discussed at the cabinet level in the administration."
The airline sector's plight is raising broader questions about the sustainability of defined-benefit pension plans, particularly in industries such as textiles, steel and manufacturing burdened with large "legacy" costs.
That, in turn, has prompted fears that the US taxpayer may eventually be required to pick up the bill for companies' abandoned commitments.
Averting this outcome would require reforms of both US bankruptcy law and pension rules, according to Bradley Belt, executive director of the PBGC.
"The challenges are multi-faceted and profound," he said in an interview with the Financial Times. "They go from the narrow role of administering the insurance programme, to the future of the defined benefits system as a whole, to the wider issue of retirement security."
He called for the rules to be tightened for weak companies with under-funded plans and simplified for those that are healthy to encourage them to stay in the system. There also needed to be a change to the premium structure that funds the PBGC.
"The level received by the PBGC is simply inadequate to cover financial claims. The deficit will get larger."
Mr Belt wants to strengthen the agency's status in bankruptcies, to "enhance our ability to recover on our claims, so we are looking at our current priority and how we might classify pension contributions as administrative expenses". Although the agency has enough assets to pay current claims, it is concerned about the impact of the imminent termination of United Airlines' pension plan, which will add a further $6.4bn in liabilities. Its existing deficit is $11.2bn and its latest estimate of overall underfunding of defined benefit plans is $278.6bn.
Concern about the fallout from United has helped forge a coalition of interest between unions and the administration.
