Fuzzy Pension Math:  Funding Shortfalls Can Be Hard to See
By Michael Schroeder, Staff Reporter
Thursday, February 24, 2005

WASHINGTON -- In 2001, Bethlehem Steel Co. told the Internal Revenue Service that its pension plan had enough money to cover 84% of future benefits.

But, in a separate report filed to the federal agency that insures such retirement plans, the company said that its pension-plan assets equaled only 61% of future obligations.  Neither of those reports was public.  Separately, the steelmaker's annual report told investors the plan was 73% funded.

When the Pension Benefit Guaranty Corp. took control of the steelmaker's pension plan in 2002, assets actually stood at 45% of its liabilities.  That cost the federal pension insurer $3.7 billion -- the largest single unfunded liability ever assumed by the agency.  Because of regulatory loopholes, the now-defunct steelmaker hadn't been required to tell employees that their retirement benefits were at risk as the plan deteriorated.

The Bethlehem case has become Exhibit A in a push by the Bush administration and members of Congress to beef up federal laws to require companies to disclose pension-plan funding shortfalls more quickly and accurately.  It is an effort that has business lobbyists bracing for a big fight.

Now, companies offering defined-benefit pensions -- including old-fashioned arrangements that provide workers a set amount of money each month based on wages and number of years on the job, as well as newer types of pensions, such as cash-balance plans -- must report information about the plans to various federal agencies, including the IRS, the PBGC and the Securities and Exchange Commission.

Weak disclosure rules, critics say, allow companies to paint a sometimes distorted picture that can keep employees, investors and regulators in the dark until it is too late.  The PBGC, which guarantees defined-benefit pension plans covering 34 million workers, often doesn't pay the total pension benefits promised by employers;  it currently assumes up to about $45,000 a year for each employee who retires at age 65.

Employee advocates say toughening disclosure rules could help pressure companies to keep promises to employees.  If struggling companies come clean quickly about funding problems, the thinking goes, employees, unions and investors can put the heat on executives to make up shortfalls.  Public fights over underfunded pensions can give companies black eyes in the marketplace.

Greater transparency "does create pressure from creditors and on the public image of companies," says Karen Ferguson, director of the Pension Rights Center in Washington.

Now, however, "there's a tremendous lack of transparency in the system," says Bradley Belt, executive director of the PBGC.  "It's a study in obfuscation."

The administration wants more information made public.  It also wants to prevent companies, in measuring the size of obligations, from using assumptions -- now permitted -- that exaggerate their plans' assets and play down their liabilities, Mr. Belt says.

To simplify the rules, companies in their IRS filings would be required to use an interest-rate formula that the administration believes would give a more accurate snapshot on a given date of each pension plan's funding level -- and remove the ability of companies to fudge numbers.

In addition, the administration wants companies to be required to report to authorities the costs of terminating their pension plans.  Terminating a plan drives up its costs because it involves immediately buying annuities in the private market to pay out all the accumulated benefits.

Some companies -- those whose plans are underfunded by at least $50 million -- already are required to outline funding on a termination basis to the PBGC each year.  While those reports are confidential, the administration would like them made public.  Last year, about 1,050 of the 31,000 pension plans insured by the PBGC filed such reports.

Business groups are gearing up for a fight.  Although companies say they back greater disclosure, the administration's proposals are "not going to be popular with plan sponsors," says Janice Gregory of the Erisa Industry Committee, a Washington lobbying group representing more than 120 large employers.  She says some proposed changes for calculating a plan's future obligations will create a too-volatile picture and may give the impression that pension funding is weaker than it actually is over the long term.

Business lobbyists also criticized the administration's proposal to require the filing of termination-liability costs.  "We think that's the wrong measure and can lead to misleading assumptions on the part of plan participants," says James Klein, president of the American Benefits Council, a national employer trade group.  He notes that the PBGC agreed in 1997 to stop publishing an annual list of the 50 corporate pension plans with the biggest funding shortfalls amid criticism that the information was misleading.

The pension problems have imposed enormous financial pressures on the PBGC, which was created by Congress in 1974 after corporate bankruptcies left retirees without pensions.  The PBGC last year reported a deficit -- an excess of liabilities over assets -- of $23.3 billion, double the gap of the year before.  The agency is funded by premium payments from companies and assets from the pension plans it takes over; it doesn't get money from taxpayers.  But some pension experts believe that, given the extent of pension underfunding in the U.S., a taxpayer bailout of the PBGC may be inevitable.

Congressional Republicans are moving to address the administration's concerns. Senate Finance Committee Chairman Charles Grassley of Iowa has reintroduced a pension bill that would include many of the proposed changes.  Reps. John Boehner of Ohio and William Thomas of California, chairmen of the House Education and the Workforce Committee and the Ways and Means Committee, respectively, also are working on legislation.

Write to Michael Schroeder at mike.schroeder@wsj.com1