Web posted and Copyright © February 1, 2005, American Bankruptcy Institute.
Grassley Plans Pension Reform
Distress terminations of pension plans are now a common feature of large chapter 11 cases. The Pension Benefit Guaranty Corp. (PBGC) faces an escalating deficit, in part due to airline bankruptcies such as that of United and US Airways. The agencyÕs single-employer insurance fund had a record deficit of $12.1 billion in FY 2004 alone, pushing the total deficit to $23.3 billion. In addition to losses booked, the PBGC calculates "reasonably possible" exposure, an estimate of the amount of unfunded vested benefits in pension plans sponsored by companies at great risk of default. The 2004 financial statements for the PBGC estimate this exposure at $96 billion. In this issue, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) responds to the Journal's questions on how he plans to deal with this looming problem in the new Congress.
ABI: The PBGC's FY2004 report shows that the agency's deficit rose to $23.3 billion from $11.2 billion the year before. There are $72 billion in future obligations by the agency's own estimates. Studies project that if the current conditions continue, the PBGC will run out of funds to pay benefits by 2020. How concerned are you that future pension payments are in jeopardy?
Grassley: We all need to be concerned about the financial condition of the PBGC. The PBGC serves an important backstop to protect workers' pensions. In the short term, everyone agrees that the PBGC has enough assets to keep paying benefits, but when we look down the road 20 or 30 years, the picture is less clear. The key to solving this problem is to make sure that companies fund their pension plans responsibly. I'm planning to work on legislation this year that will do just that so that workers can count on their pensions being there for them when they retire.
ABI: With some U.S. airlines and other large companies in manufacturing, steel and other industries skipping pension payments and threatening default on their retirement obligations, could the moves lead to a taxpayer bailout of the pension agency?
Grassley: Pension promises to workers must be kept, and those promises should be kept by the companies that make them. It's not fair to have American taxpayers picking up the bill. I'm confident that the ideas that the President has outlined and reforms that we will work on in the Finance Committee will avoid any future need for a taxpayer bailout of the PBGC.
ABI: Should companies in bankruptcy be required to maintain their pension plans? Do companies use the PBGC as a pension dumping ground to boost their economic prospects and get a leg up on the competition? Should healthy companies pay higher insurance premiums to keep the agency going?
Grassley: The PBGC's role is to serve as a backstop for workers' pensions, but the primary responsibility has to remain with the employers who make pension promises. If companies are trying to play games with their pensions, then we need to eliminate any opportunity to do so. We also need to make sure that any companies that are bad actors are punished. I'll be taking a comprehensive look at these issues in my role as Finance Committee Chairman. On the issue of higher premiums, the current financial condition of the PBGC probably requires all companies to pay higher premiums, but I actually think it is the companies that pose the most risk to the PBGC that should pay the highest premiums. That's just common sense. If you have a bad driving record, you pay higher car insurance premiums. In the same way, companies that have underfunded their pension plans should pay a higher premium to reflect the risk they pose to the PBGC.
ABI: Does the Bankruptcy Code contribute to the pension crises? Does the Code give debtors a way to unload their promises to their employees and retirees in the name of financial distress?
Grassley: We need to look at every aspect of federal law in dealing with the PBGC, and the Bankruptcy Code is certainly another area for review. Today, the PBGC falls pretty far down the list of bankruptcy priorities, and it might make sense to have them move further up the line.
ABI: Are traditional single-employer, defined-benefit plans outdated?
Grassley: Traditional defined benefit plans still play a very important role in our national retirement policy. As I said earlier, the key is to make sure that the promises made to workers under these plans are kept, and that they're kept by the folks who make the promises. The world is increasingly gravitating to 401(k) plans, which have been a great success overall, but traditional defined benefit plans need to be preserved as another option to get pension coverage to workers.
ABI: How quickly do you think Congress will act on reforms such as the National Employee Savings and Trust Equity Guarantee (NESTEG) Act of 2004 (S.2424), and comment on its importance to ensuring a healthy pension system?
Grassley: Pension reform and improving retirement security for all Americans is at the top of my list of priorities for this Congress. You can expect the Finance Committee to take action on the NESTEG bill early in the year, and I am working on adding to all of the positive reforms in NESTEG with additional improvements and reforms in this area.