Chrysler: The Next Pension Crisis?

When the details of Chrysler's restructuring plan were announced on Apr. 30, few could have breathed a deeper sigh of relief than the managers of the Pension Benefit Guaranty Corp. The PBGC is the insurer of defined-benefit pension plans—that is, traditional pensions—and it could well have ended up tending to the 255,000 people covered by the automaker's pensions. But instead, the Chrysler plan, in which the United Auto Workers has taken a big hand, will remain in place, presumably to be transferred from the bankrupt company to the one that emerges, solvent, down the line.

But for the PBGC, and for Chrysler employees, it's quite possible that all that's been done is to delay the inevitable. Chrysler's pension plans are $9.3 billion underfunded. The company likely won't have to make a contribution for about two years, because of the intricacies of pension funding rules, says Charles E.F. Millard, director of the PBGC until this past January. But once that respite is over, the company will have to hurry up to fill the gap, contributing as much as $1 billion a year.

"For the moment, the pensions are saved, the unions are saved, the PBGC is saved, and management gets to worry about something else," Millard says. "That leaves the pensions as the elephant in the room for the future.…Realistically they're going to have some significant pension obligations that nobody's talking about now."

PBGC Faces Its Own Challenges

Millard's temporary replacement, Acting Director Vince Snowbarger, acknowledges that this may be a temporary respite. Snowbarger agreed as part of the deal to allow Daimler (DAI), which earlier had promised to contribute $1 billion to the Chrysler pension plans if the company shed them, to instead put in $600 million now, hoping the company returns to health and can maintain the plans itself.

"It was not in the interest of Chrysler workers, Chrysler, or the PBGC to terminate these plans precipitously," says Snowbarger. "One of our statutory missions is to help preserve these pension plans. It could be that in 10 years down the line it looks like we made a big mistake keeping them out there because the hole is just bigger, but presuming they can get on their feet, this is worth doing."

Snowbarger and the PBGC are facing their own challenges. While many companies have stopped offering defined-benefit plans (in which the company takes the responsibility for providing a predetermined retirement payout), the PBGC still insures defined-benefit plans that cover 44 million workers at 29,000 different companies.

If a company fails while its pension plan is underfunded, the PBGC is obliged to pick up the plan and pay retired workers. But it may not pay the full pensions that workers thought they were going to get; in some cases, such as the steel companies and airlines that filed for bankruptcy in the 1990s and early 2000s, many workers who had retired early with their full promised pension saw their monthly checks cut by more than 25%. A 2008 PBGC study of 125 plans terminated between 1990 and 2005 found 16% of the 525,000 participants suffered an average benefit reduction of 28%. Of the 70,000 retirees of Bethlehem Steel, whose plan the PBGC took over on Apr. 30, 2003, about 11,000 lost benefits, typically $500 of their $2,050 average monthly check.

Big Failures, Big Headaches

For the PBGC, the size of Detroit's plans is daunting. The insurer estimates the pensions of the U.S. automakers and their suppliers are underfunded by a combined $60 billion. GeneralMotors (GM) alone has 670,000 pension participants and would pose big logistical challenges, including the task of shifting billions in assets to match the PBGC's investment policies.

Last fall, Millard pushed the PBGC to use Lehman Brothers' sudden failure as a "dry run" for the potential of large failures that would leave the PBGC to absorb massive pension plans, including at the automakers. "We saw the huge challenges that might well lie ahead, and wanted to have the resources to deal with what could be a tsunami," Millard said.

For the union, meanwhile, there are strong incentives to keep its pension out of the PBGC's hands. The agency caps the benefits it will pay, at about $54,000 a year for an individual retiring at 65 under a plan closed this year. But younger retirees, of which there are many in the auto sector, are entitled to far less. Retire at 50, for example, and you can't get more than $18,900 a year, even if you've worked 30 years and would be entitled to a full pension. The PBGC also doesn't pay many early-retirement benefits common in UAW contracts.

The net result: Of GM's $20 billion shortfall, for example, the PBGC would only cover $4 billion. Chrysler is $9.3 billion in the hole, but the PBGC would only fill in $2 billion of that. The rest would come out of pensioners' checks. (PBGC funding figures are calculated differently than those disclosed in companies' Securities & Exchange Commission filings.)

Depleted Coffers

Today corporate pension funds are badly depleted, for the same reason that worker-managed 401(k) plans have suffered: The underlying securities took huge market losses in 2008. Benefits consultant Watson Wyatt (WW) calculates that the 100 largest pension plans are now $217 billion in the red, with enough assets to cover 79% of their long-term promises, down from an overfunding of 109% just one year earlier. Their investment loss: $300 billion. Jim Keightley, former general counsel of the PBGC and now a partner with Keightley & Ashner, a Washington law firm specializing in PBGC cases, says he doesn't think a hole of that magnitude can be made up.

Certainly the gap can't be closed without big employer contributions. One reason is that more and more companies are moving to liability-driven investing for their pension funds, which would tend to lock in their losses by reducing exposure to equities, interest rates, and other risks. That approach does help to ensure that the hole doesn't get deeper, though.

Keightley and others note the PBGC, by contrast, is going the other direction with the management of its own funds, which come from premium payments by covered companies and the assets of terminated plans the insurer has taken over. The PBGC is now moving to increase its exposure to equities, real estate, and private equity in a bid to improve its investment performance and close its own funding hole.

Funding Gap

All told, the PBGC is moderately well funded compared with many of the pension plans it insures. Its single-employer plan had about 85% of the assets it needed to pay off every dime of the pensions it managed as of last fall. But that gap has widened since, and the PBGC now has a deficit in excess of $11 billion, which they project to grow to $26.3 billion over the next 10 years. Millard and his supporters hope that diversifying investments away from a heavy concentration on bonds could help close that gap, minimizing the help the insurer might someday need from Congress. (Though the President appoints the PBGC's director and it reports to the Labor Dept., it is not explicitly backed by the U.S. government.)

Whatever the agency's investment strategy, the deep recession and financial crisis mean more pension plans are likely to land in its lap. That could well exacerbate its long-term funding issues, as more underfunded plans swell the agency's funding gap. But that's not always the case. Last fall, the PBGC took over the pension plan of Lehman Brothers, which the agency estimated was 95% funded—considerably better than the PBGC as a whole. As a result, adding Lehman's pension plan widened the PBGC's funding hole by about $18 million in dollar terms, but actually left the agency slightly better off on a percentage basis.

At the same time pension plans are struggling, companies have been lobbying to be able to put off makeup payments, citing the pressures of the recession and the sharp ramp-up in what they would owe. They got some respite from the Internal Revenue Service earlier this spring, but Snowbarger has little patience for the requests.

"Since I got here in 2002, plans have had nothing but funding relief," he says. "They're pushing a mountain of contributions off into the future. When do you pay those? When do you catch up?"

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