The Association of U S West Retirees



Bankruptcies Swell Deficit at Pension Agency to $33.5 Billion
By Eric Lipton
New York Times
Wednesday, May 20, 2009

WASHINGTON — The deficit at the federal agency that guarantees pensions for 44 million Americans more than doubled in the last six months to a record high, reaching $33.5 billion, largely as a result of the surging number of bankruptcies among companies whose pensions it must now take over.

The Pension Benefit Guaranty Corporation, as of October, had faced a shortfall of $11 billion.  But the combined effect of lower interest rates, losses on its investment portfolio and the increase in the number of companies filing for bankruptcy protection resulted in a deepening of its estimated deficit, officials said Wednesday.

Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.

“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director, Vince Snowbarger, said in a statement Wednesday.  “Nevertheless, over the long term, the deficit must be addressed.”

The agency, created by Congress in 1974, is now paying benefits of about $4.3 billion a year to about 640,000 people.  Employers nationwide with so-called defined-benefit pension programs pay insurance premiums to the agency in return for a promise that it will take over their pension plan if a company fails.

On Tuesday, for example, the agency announced that it had assumed the pension plan once run by the Lenox Group, a bankrupt maker of tableware, giftware and collectibles based in Eden Prairie, Minn.  Assuming control of pensions for this company’s 4,300 workers will cost the agency an estimated $128 million — the difference between what Lenox had in its pension fund and what the total estimated obligations are.

With the bankruptcy of Chrysler and a possible similar move by General Motors, the agency is facing a record surge in demand.  The new deficit estimate takes into account both pensions it has taken over in the last six months, and others it believes it will have to assume control of soon.

In the statement, the agency said that the $22.5 billion deficit increase was the result of about $11 billion in completed and probable plan terminations, about $7 billion from a decrease in the interest factor used to value liabilities, about $3 billion in investment losses and about $2 billion in actuarial charges.

Options to close the deficit include a federal bailout by taxpayers, a change in insurance premiums it charges employers or a successful strategy to increase its investment returns.

Last year, the agency’s board — made up of the secretaries of the Labor, Treasury and Commerce Departments — voted to allow it to shift its investment strategy to put more money into stocks, private equity and real estate, in an effort to reduce the deficit.

If that shift had taken place, the losses would most likely have been larger.  But a relatively small amount of the funds had already been shifted to stocks, so the losses on the investment portfolio were responsible for just $3 billion of the jump in the deficit in the last six months.

The agency’s more aggressive and risky investment strategy, the rising deficit and questions about possible improprieties by its former director, Charles E. F. Millard, will all be addressed at a Senate hearing scheduled for Wednesday afternoon.

Mr. Millard, who resigned in January, has been accused by the agency’s inspector general of having inappropriate contact with companies including BlackRock, JPMorgan Chase and Goldman Sachs as they competed last year for the right to manage $2.5 billion worth of the agency’s portfolio, contracts that may now be canceled.