- The Washington Times - Friday, October 24, 2008


The government’s pension-rescue fund suffered heavy losses in the stock market this year but has still managed to lower its deficit to $12 billion, leaving it strong enough to protect American workers’ pensions in the short term even if several major companies fail during the burgeoning economic crisis, the chief of the Pension Benefit Guaranty Corp. told The Washington Times on Thursday.

“I can’t foresee any realistic circumstances under which the PBGC would need to be bailed out by the taxpayer in the next 10 years,” Director Charles E.F. Millard said.

Mr. Millard is prepared to be questioned Friday by members of Congress about some $3 billion in losses the fund suffered in the stock market during the first 11 months of fiscal 2008, but he plans to tell lawmakers that those losses were countered by strong earnings from bond investments and reductions in the agency’s overall liabilities. As a result, he told The Times, the fund actually improved its overall financial position during a turbulent year, shaving $2.1 billion from the $14.1 billion deficit it had at the beginning of the year.

The PBGC is poised to become an increasingly important player in the economic crisis as analysts foresee several more corporate failures, which would thrust major new pension liabilities upon the federal agency. While Mr. Millard remains confident of the fund’s short-term ability to protect pensions, there is near universal agreement among pension analysts that the long-term problems are much more serious.

Because the PBGC has only 30 percent of its assets invested in equities, the agency incurred “a decline in total assets of only 6 percent at a time when most investors like us were down in the mid-teens” for the 12 months that ended in September, said Mr. Millard, who testifies Friday before the House Education and Labor Committee.

At the end of fiscal 2007, the PBGC held $68.4 billion in assets and $82.5 billion in liabilities, resulting in the $14.1 billion deficit.

To buttress his point that the prospect for a near-term taxpayer bailout was remote, Mr. Millard emphasized that the agency pays out about $2.5 billion per year, while its $60-billion-plus asset portfolio includes more than $15 billion in ultra-safe Treasury securities.

“In fact, our actuaries have performed a study which concludes the likelihood we would have such a problem 20 years from now is below 2 percent,” he told The Times.

Asked about the effect of a General Motors bankruptcy upon the PBGC, Mr. Millard noted, “While the company is facing tremendous problems today, GM’s pension plan is reasonably well funded.”

The PBGC, created in 1974, receives no taxpayer funds. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees. When an employer can no longer afford to sustain a pension plan, frequently after it enters bankruptcy, the plan is terminated, and PBGC inherits its assets and liabilities and guarantees benefits that are often lower than prescribed by the plan. Nine of the 10 largest plan terminations in PBGC’s history have occurred since 2000, and an estimated 75 percent of the agency’s losses have come from the airline and steel industries.

There is no question that private-sector pension funds have been adversely affected by the massive declines in the stock market over the past year. Since reaching its historic peak a year ago, the S&P 500 stock index has lost more than 40 percent of its value. Pension funds generally have about 60 percent of their assets invested in stocks.

The market downturn also has clobbered public-sector pension funds, which are not insured by the PBGC. In the past year, for example, the California Public Employees’ Retirement System has seen its pension-fund assets plunge from $260.4 billion to $192.7 billion, a 26 percent haircut.

Citing data from the Federal Reserve, Congressional Budget Office Director Peter R. Orszag told Congress earlier this month that the assets of private and public pensions declined by “roughly $1 trillion - almost 10 percent of their assets” from the second quarter of 2007 through the second quarter of 2008. “And there has been a significant further drop in asset prices since then,” Mr. Orszag told the House Committee on Education and Labor.

Indeed, since the end of June, the S&P 500 has declined 30 percent.

“With the fall in various securities markets, it obviously has very serious implications for defined-benefit pension plans. If you combine it with a recession, companies are more likely to fail at the very time that pension assets are going down and the plans are becoming less well-funded,” said Alex Pollock, a scholar at the American Enterprise Institute for Public Policy Research. “The government, in the form of the PBGC, has to pick up their unfunded pension liabilities.”

While acknowledging that the federal government was “not a guarantor in law,” David John, a pension analyst at the Heritage Foundation, said, “It’s pretty well recognized that if the PBGC finds itself desperately in need of funds, the taxpayer will provide them. It’s not a question of if the PBGC needs taxpayer money, but when and how much.”

Mr. Millard and pension analysts emphasize that the PBGC inherits not only a company’s pension liabilities but its pension assets as well.

“If there were a dramatic increase in plans taken over by the PBGC and if there had to be a taxpayer bailout, the cost to the taxpayer would be mitigated by at least on factor,” said Mark Iwry, a senior fellow at the Brookings Institution who served as chief pension regulator at the Treasury Department during the Clinton administration. “PBGC’s assets would increase promptly as it takes over plans, while the liabilities it assumes stretch out over time,” Mr. Iwry explained. That infusion of assets would be available to meet current payment requirements.

Mr. Pollock noted that while any taxpayer bailout would involve “big numbers,” the total would be “nothing compared to Fannie Mae and Freddie Mac,” each of which may need $100 billion or more.

Regardless of what the cost to taxpayers may be in the long term, “the business community is worried about major, sudden increases in funding requirements and is looking for relief,” Mr. Iwry said. “That is something Capitol Hill is considering.”

Bruce E. Bach of Watson Wyatt, a human-resources consulting firm, said his clients are “very concerned about funding obligations,” but the cash requirements would not hit until 2009. “Conditions today are not as important as where they will be on Dec. 31. That’s what’s going to direct a lot of the funding requirements.”

If the volatile stock market stages a year-end rally, the increase in pension-funding requirements may not be nearly as onerous as it appears now.

On the other hand, if market conditions remain the same, or worsen, “that circumstance could force employers to raise contributions to help trim the shortfall, reducing the cash that they have available for investment, hiring or distribution to shareholders,” Mr. Orszag, the CBO director, told Congress earlier this month. Such a situation could deepen a recession, exacerbating pension-funding problems.

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