Congress to Probe Unfunded Pension Liability

Fearing that airlines and other struggling industries could present the country with its next S&L crisis, Congress and the White House are pushing an overhaul of pension-funding rules that has been overshadowed by Social Security (search).

The heads of three major airlines were called to appear Tuesday before the Senate Finance Committee. Its leaders are alarmed that the Pension Benefit Guaranty Corp. — the federal agency that insures private pension plans (search) — already has a $23.3 billion deficit because of defaults.

More than half of the 100 largest plans had less than their promised benefits on deposit, which the committee's chairman blames on lax rules that are supposed to guarantee full endowment.

About 34 million people — roughly 20 percent of the nation's workforce — expect to receive payments from their employers through defined benefit plans.

The risk those workers face was highlighted last month when a federal judge allowed United Airlines to default on $9 billion in pension obligations as it attempts to emerge from bankruptcy (search). The ruling shifted responsibility for paying benefits for 120,000 current and former workers to the PBGC, but the agency will pay only about two-thirds of promised benefits.

"In addition to allowing plans to book phantom investment gains, United was able to use stale, non-market interest rates to value pension liabilities, thereby further disguising funding deficits. In other words, our pension laws tell companies, 'Take off the green eye shades and put on rose-colored glasses,"' Sen. Charles Grassley, R-Iowa, said in an opening statement prepared for the hearing.

The chairman said current law allows corporate deception similar to criminal activity alleged at Enron Corp., adding: "The same blinders that United put on are used by companies everywhere."

The pension funding problem recalls the savings and loan crisis of the 1980s, when hundreds of thrifts became insolvent and were taken over by the government. A congressional study in 1996 put the price tag for the S&L bailout at $480.9 billion.

In January, the Bush administration proposed an overhaul of regulations dating to the 1974 establishment of the Employee Retirement Income Security Act and the PBGC.

Among the changes favored by the White House are a boost in the PBGC premiums paid by employers, as well as a rewrite of rules that have allowed companies to use favorable stock trends and interest rates to conceal underfunding in their plans.

Similar legislation is being drafted in the House by Rep. John Boehner (search), R-Ohio, who serves as chairman of the House Committee on Education and the Workforce.

Airline pilots in particular are concerned that other airlines may follow United's lead if they perceive the carrier gaining a competitive advantage by dumping its pension obligation. Among those invited to testify were United Chairman Glenn Tilton, Northwest Airlines Chairman Douglas Steenland and Gerald Grinstein, chief executive of Delta Air Lines.

"Under current law, the only way an airline can avoid burdensome pension costs is by entering bankruptcy and terminating the plans," said Duane Woerth, president of the Air Line Pilots Association, in remarks prepared for the hearing.

"But if more and more airlines choose to shed their pension liabilities in bankruptcy, it sets up the potential for the 'domino effect,' in which all the other legacy carriers are incentivized, or even forced, to file bankruptcy, in order to achieve the same cost savings and level the playing field," Woerth said.

Rep. George Miller of California, the top Democrat on the Workforce Committee, urged Boehner to also include language in his bill requiring companies to release more of the data about their plans that they provide to the PBGC. The congressman argued it frequently does not jibe with more general information released to the public.

"The differences are dramatic," Miller wrote in a letter dated Monday. "Some companies report financial results for the pension plan assets and liabilities in their 10-Ks that are hundreds of millions of dollars — and in some cases, billions of dollars — more optimistic than their secret 2010 filings."