The Protector Of Pensions Develops Its Biceps

As agencies go, the Pension Benefit Guaranty Corp. used to be the federal government's Rodney Dangerfield. In the 1980s, dozens of companies failed to inject promised money into pension plans the PBGC insures. Some even declared bankruptcy so they could dump their pension liabilities on the agency. The unhappy result: On Feb. 27, the PBGC announced a deficit of $1.8 billion, nearly double 1989's figure.

But suddenly, the PBGC is getting respect. With new powers from Congress, it is displaying fresh aggressiveness in recouping money from failed companies. And that's fine with other firms, who hate seeing competitors gain an advantage by off-loading their pension obligations. "We will be looking to the PBGC to go after them," says Armco Inc. lobbyist John L. Bauer.

The PBGC's switch from wimp to bully, though, is infuriating creditors of bankrupt companies, who allege that the PBGC's hardball tactics can wreak havoc with reorganization plans. They also charge that money the PBGC snags will slash the funds available for bondholders, suppliers, and retirees for health benefits. Says Los Angeles bankruptcy lawyer Ken Klee: "If priority creditors insist on taking everything, businesses will liquidate rather than be rehabilitated."

PREMIUM SHOCK. Congress created the PBGC in 1974 to insure private defined-benefit pension plans, which promise retirees specified monthly payments. The agency is financed by premiums paid by employers. But PBGC Executive Director James B. Lockhart III says those aren't enough to keep the fund healthy. The recent bankruptcies of Pan Am, Eastern, and steelmaker CF&I have added to the agency's woes. And 27 other ailing companies have $8 billion in unfunded pension liabilities. The PBGC won't run out of cash for a decade, but Lockhart fears that if he doesn't go after corporate assets, he'll have to raise annual premiums, which have reached $72 per employee in some cases vs. $1 in 1974. "We're trying to maximize our recoveries to minimize the hits to our premium payers," he says.

The PBGC's hand was strengthened last June when it won a Supreme Court victory over LTV Corp. The agency had assumed responsibility for four of the bankrupt company's pension plans, which were underfunded by about $2 billion. This threat to the PBGC's solvency ended when the high court ruled LTV should take back three of the plans. After months of haggling that held up LTV's reorganization plan, the company has tentatively agreed to pump $3 billion into its plans over 30 years, and talks have started on a payment schedule. LTV may have to pony up an initial payment of $400 million, which could force an asset sale, possibly of its aerospace unit.

CLIPPED WINGS. LTV isn't the only target. In 1987, Congress empowered the fund to hold corporate affiliates responsible for each other's pension liabilities. The tactic was one factor in Continental Airlines Holdings Inc.'s bankruptcy filing. When Eastern Air Lines Inc. couldn't make good on $700 million in pension promises, the PBGC pursued claims on its parent, Continental. To keep liabilities from rising, the agency terminated the pension plan and got $30 million from Eastern and $80 million from Continental. But Continental couldn't come up with collateral for the rest and entered Chapter 11 in December.

While Congress has given the PBGC new clout, lawmakers didn't guarantee it success at getting its money. To increase its chances, agency lawyers argue that the PBGC should have priority over other creditors for some claims. But last May, a judge in the LTV bankruptcy proceedings ruled that the agency shouldn't be treated as more equal than other creditors. In the Continental case, creditors are fuming at similar PBGC demands--partly because the agency's claims were against Eastern, not Continental. Continental's lenders are fighting the PBGC's attempt to sit on their creditors' committee.

The PBGC now plans to ask Congress for legislation to elevate its status in bankruptcy court. If it prevails, creditors and attorneys worry that banks would balk at making unsecured loans to healthy companies with underfunded pension plans. In turn, they say, that could keep companies from creating pension plans. None of this fazes Lockhart, though. His goal is simple: to avoid taxpayer bailouts. With the PBGC's new clout, he may have a start.

      The Pension Benefit Guaranty Corp.'s deficit, currently $1.8 billion, could 
      swell by billions more if the agency has to take over these unfunded pension 
                         Millions                 Millions
      LTV                 $3,100  WESTERN UNION     $400
      PAN AM                 800  CF&I STEEL         200
      EASTERN                700  TWA                130
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