The pension default by United Airlines (search) is putting heavy new pressure on the financially strapped federal agency that protects private pensions for millions of workers and retirees.
The United case also will probably intensify efforts in Congress to strengthen the Pension Benefit Guaranty Corp. (search) and revamp rules that companies follow to fund their pensions.
The agency has estimated that private pension plans are underfunded by more than $450 billion, a record.
The agency was created in 1974 as a government insurance program for traditional "defined benefit" pension plans. Its deficit more than doubled to a record $23.3 billion last year. That shortfall assumed that the agency would take over United's pension obligations, officials said.
"United's ability to shift any pension obligations to the PBGC is going to tax further the agency's already strained resources," said Barbara Roth, a partner at Torys LLP, an international law firm.
The agency last year said it had $39 billion in assets to cover $62.3 billion in pension liabilities. Even with the record deficit, the agency has "sufficient assets to pay all benefits for a number of years into the future," spokesman Jeffrey Speicher said. "Our financial problem is a long-term one."
Private analysts warn that the problems could worsen if other ailing companies jettison their pension plans.
The defined benefit pension plans protected by the agency are prevalent in older industries, such as automobile manufacturing, steel and airlines.
Manufacturers have been hard hit by foreign competition and the 2001 recession. Airlines were staggered by the attacks of Sept. 11, 2001.
The agency's operations are financed largely by insurance premiums, which are paid by companies that sponsor traditional pension plans. It also earns money from investments and receives funds from pension plans it takes over. The agency is not funded through tax revenues.
Analysts and others worry that a taxpayer-funded bailout could happen at some point if the agency cannot get on sound financial footing.
To accomplish that, a Bush administration plan would include increasing a current premium of $19 a year per worker or retiree to $30 a year. Congressional approval is needed to change the current premium, which was set in 1991.
Analysts cite several factors for the underfunding of private pension plans: the fallout from the recession four years ago, a bumpy stock market, an aging population and rigid pension accounting rules.
The takeover of United's pension program "is bad news for everybody," James Klein, president of the American Benefits Council (search).
His group wants Congress to overhaul pension funding rules. "It puts added pressure on other air carriers that they might have to follow suit," he said.
The agency currently insure pensions covering 44.4 million workers and retirees.
A plan approved Tuesday by a bankruptcy judge in Chicago cleared the way for the agency to take over United's pension, paying out $6.6 billion to about 120,000 current and retired United workers.
The agency does not guarantee the same benefit a company promises its workers. The maximum annual benefit for plans taken over in 2005 is $45,614 for workers who wait until 65 to retire. Workers who retire before 65 get smaller benefits.
The United case surpasses the previous record pension default of $3.7 billion by Bethlehem Steel Corp. (search), agency officials and analysts said. That pension plan was terminated in 2002 and taken over by the agency in 2003.