The Medicine for Ailing Pensions?

The Pension Benefit Guaranty Corp.'s Bradley Belt tells why the President's plan will stop the hemorrhaging, although businesses disagree

The woeful underfunding of corporate pension plans threatens the retirement security of millions of workers. It also undermines the health of the Pension Benefit Guaranty Corp. (PBGC ), the federal corporation that insures old-fashioned "defined benefit" pensions for 44 million Americans.

While the PBGC has enough assets to cover its pension obligations through 2020, it already faces a $23 billion deficit. That could worsen if other carriers follow United Airlines' (UALAQ ) move to dump its pension plans on the PBGC. United's plan terminations will saddle the agency with $6.6 billion in unfunded obligations.

To avoid a taxpayer bailout of the PBGC, the Bush Administration has proposed a plan that requires companies to pay higher premiums to the agency and to sharply increase their pension-fund contributions. Corporate America argues that such measures could force more companies to freeze their pension plans (see BW, 5/16/05, "Rising Tensions Over Pensions").

It's up to PBGC Executive Director Bradley D. Belt to convince lawmakers and business leaders that the tough medicine is warranted. On Apr. 28, Belt discussed the sorry state of pension plans and the PBGC's own finances with BusinessWeek Washington Correspondent Amy Borrus. Edited excerpts from the interview follow:

Q: Employer groups say the PBGC is exaggerating its predicament, since it isn't in any danger of running out of money for years.


The PBGC is not facing a liquidity crisis. It has $40 billion in assets to fund longer-term obligations and had to pay out only $3.5 billion in benefits last year. But there's a substantial amount of risk out there. The problem is that the hole is deep and getting deeper. If we don't take action now, it will get [even] deeper.

Q: Critics contend that the PBGC's decision to invest its assets more conservatively is making a bad situation worse. Why are the agency's assets weighted so heavily toward government bonds?


We are not investing like a traditional pension plan. We already are exposed to equity risk through the plans we insure. We're trying to hedge or match our overall risk exposure. [Investing more in stocks] would be akin to a property and casualty insurer in Florida having all its assets in beachfront property.

Q: Companies that offer pensions say they're victims of a perfect storm of low interest rates and low stock prices. But couldn't they have put more money into their pension plans when markets were booming without hitting the ceiling on tax-deductible contributions?


There's no question that the maximum deductible contribution limit has had some impact, but even in the best of years, more than two-thirds of companies never hit their limit [before punitive taxes kicked in].

Q: Employers are upset that the Bush Administration's plan would eliminate credit balances that let companies contribute more in certain years and then take a funding "holiday" in other years. Why eliminate this flexibility?


There are ample incentives under the President's proposals to fully fund your pension plan. And it's the right thing to do. Why are you insisting on putting in only the legally required contribution when you have the wherewithal to do more?

Q: Why not let companies continue to use interest rate assumptions to smooth out annual fluctuations in plan assets and liabilities?


Smoothing is inconsistent with every other aspect of business operations. We generally live in a mark-to-market world. Shareholders want this information. They're the owners of the company. Whose interest is being served by masking risk and volatility inherent in the system?

Q: Aren't you worried that the Administration's plan, if enacted, could prompt companies to stop offering pension plans?


If people want an excuse to exit the defined-benefit system, this gives them one. But it was under current law that the number of defined-benefit plans fell from 112,000 in the mid-1980s to 30,000 today. We're trying to stop the hemorrhaging.