The Pension Benefits Guaranty Corporation (PBGC) and Corporate Bankruptcies
Editor's Note- For related and earlier items on this topic please see our article "Corporate Health Care and Pension Plans".
In respect to the issue of health care and pension plans for governmental organizations please see our article "Federal, State and Local Government Pension and Health Care Plans"
(3/1/08)- We at therubins fully support The Pension Benefits Guaranty Corp., (PBGC) and its director Charles E.F. Millard in its recently announced intention to diversify its investment policy towards having a greater exposure to equities and alternative investments, such as real estate in its portfolio. Under its present investment policy, the agency estimates that it has 72% of its assets in cash and fixed-income securities.
Under the new investment strategy plan, the agency's investment in equities would jump from 28% to 45%, with an additional 10% of the portfolio being invested in "alternative investments". It plans to keep about 45% of its portfolio invested in fixed-income items.
Obviously this strategy is a riskier one, but we feel that the potential for rewards far exceeds the risks of loss. With interest rates being at exceeding low levels, and with the stock market having corrected almost 20% from its recent highs it seems to us to be a propitious time to make this move.
The agency had built up a $9.7 billion surplus by 2000, but two factors caused the surplus to turn to a deficit of over $14 billion by 2007. First of all the great number of bankruptcies in industries such as the steel and airline industries threw many of these worker's pension over into the hands of the PBGC. Secondly, with the drop in interest rates, the factor used to calculate the present value of companies future pension obligations increased rapidly.
There is currently about $66 billion in under-funded pensions held by PBGC-insured companies with credit ratings below investment grade. This figure is sure to grow as the ratings of corporate America will continue to increase as more and more companies feel the pressure of our weakened current economy.
Many of you may ask, why we at therubins are in favor of increased equity exposure by the PBGC, when at the same time we opposed having individuals making their own decisions with their social security investments? Our answer to that question is because we feel that the professionals who will be making the decisions for the PBGC have much greater knowledge in the area of financials than does the average investor who usually does not have much financial fixed income and/or equity experience.
(5/14/07)- The judge overseeing the auto-parts maker Collins & Aikman Corp.'s bankruptcy case has approved a $96.2 million settlement between the company and the PBGC. The company, which is based in Southfield, Mich., is but one of several auto-supply companies in, or about to come out of. bankruptcy. One of the most important bankruptcy matters for all of corporate America is the one pending now between Delphi, the former subsidiary of GM, and the UAW, for its effect on corporate pension and health care obligations of all employees in this country.
The settlement gives the agency an $8.4 million claim that will be paid in cash on the day the company exits from bankruptcy. The PBGC will also receive an allowed general unsecured claim of $87.8 million under the company's Chapter 11 plan. The agency had a potential claim totaling $192 million against the company in connection with funding obligations for its pension plan that it will now be administering.
The two industries that cost the PBGC the most for pension plan failures are the airline and the auto supply companies in or out of bankruptcy.
(11/20/06)- For the second year in a row, the deficit of the Pension Benefits Guaranty Corporation (PBGC) continued to shrink. The agency revealed in its annual report, that as of September 30th it had assets of $60 billion to cover liabilities of $78.1 billion, leaving a deficit of $18.1 billion.
The reduction in the amount of the deficit was attributed mainly to a provision in the new pension law that allows bankrupt airline companies extra time to become financially viable.
The deficit for the PBGC reached its peak in 2004 when it was $23.3 billion, which dropped slightly to $22.8 billion in 2005. According to Vince Snowbarger, the interim director of the agency: "The PBGC's financial condition appears to have stabilized for the time being, ".
The agency is now responsible for the pension benefits of 1.3 million workers and retirees, reflecting no net change from last year. The amount of benefits paid increased to $4.1 billion this year from $3.7 billion last year. The amount is projected to increase to $4.8 billion next year.
According to the latest figures, traditional pensions are under-funded by $350 billion, compared with $450 billion last year. Higher interest rates, a better-performing stock market, improved credit ratings and better plan funding by some companies were the reasons given for the improvement, according to some economists.
(9/13/06)- One of the problems that many people face, what with the movement from one job to another, or one company taking over another company, is the fact that a person may lose track of his or her pension benefits from past jobs. The Pension Benefits Guaranty Corporation (PBGC) holds about $75 million in unclaimed benefits for almost 26,000 people whose defined-benefit plans were closed.
The average benefit that the agency holds is about $3,675, and the Labor Department estimates that 1,650 401(k) plans covering 33,000 workers, holding $868 million in assets are terminated each year.
The PBGC has a site that will help you find out if you do have any defined-benefit pension that you may have lost track of. To start your search, go to search.pbgc.gov. Type in your last name to find out if you are on the list of "lost" beneficiaries. You can also enter the company's name to see if the agency has taken over the plan.
If your search is to no avail there are other options for you to use to help you find your "missing" plan. The PBGC, in conjunction with the Pension Action Center at the University of Massachusetts, Boston developed a site that is a primer to use in helping you with your search. It is located at pensionaction.org/publications/lostpension.htm.
Another site that may help you in your search is FreeErisa.com, which has a huge database of pension-plan tax returns that include information about the plan administrator, service providers and actuaries. Another Web site, coporateaffiliations.com tracks mergers and acquisitions. The Labor Department's Employee Benefits Security Administration offers help searching for terminated or abandoned 401(k) plans through offices, listed at dol.gov/ebsa/aboutebsa.
(6/10/06)- Bankruptcy Judge Adlai S. Hardin in White Plains, New York, approved the agreement reached signed by Delta Air Lines and its pilots union wherein the 5,930 active pilots agreed to an initial 14% pay cut and not to contest the termination of the pilots' pension plan. In return for these concessions the company would issue a $650 million note, and $2.1 billion in unsecured claims to the union.
Both the PBGC and the retired pilots association opposed the settlement. The PBGC argued that it should have received the $650 million note and $2.1 billion in unsecured claims against the company since it now would be responsible for payments to be made to the pilots. Delta's pilots pension plan was many billions of dollars under-funded, and the federal agency will now have to pick up the pension payments.
The unsecured claim would be converted to a yet-to-be-determined stake in the reorganized company.
Delta agreed to give retired pilots $9 million to cover a portion of certain pension benefits that the retired pilots would have received since the bankruptcy filing in September, had the benefits not been frozen.
(4/5/06)- Negotiations to reconcile differences in federal pension overhaul legislation have stalled according to Senator Mike Enzi, chairman of the committee that is attempting to reconcile the different measures that had been passed by the House and the Senate. Time is of the essence, since most companies that have to make contributions to their traditional defined-benefit pension plans have until April 15th to do so.
For the past two years, companies had been able to use a more favorable blend of corporate bonds to calculate how much was required to be contributed, but that temporary provision expired on December 31, 2005. The yield on the 30-year Treasury bond will have to be used unless a new funding rate proposed in the pension legislation is approved.
A spokesman for the PBGC said that the Treasury bond rate would not apply until April 15th, 2007 for most plans. The higher the rate, the more the pension plan can assume it would earn in the coming years, so that the lower yield on the 30-year Treasury would mean that the plan would have to calculate a lower earning for the plan.
Bradley Belt, recently submitted his letter of resignation to President Bush effective the end of May as the executive director of the Pension Benefits Guaranty Corporation (PBGC). He will have served in that post for two years. Mr. Belt was a former senior staff member of the Senate Banking Committee and the Securities and Exchange Commission.
His resignation came unexpectedly, and is occurring during a difficult period for the agency. Because of the recent bankruptcies in the airline, steel and automotive supply industry, the deficit of the PBGC has ballooned to $22.8 billion. He had been at odds with the administration recently because of his desire to have more of an impact on the pending revision to the law affecting the PBGC.
The board of the PBGC includes the secretaries of Treasury, Labor and Commerce, who have become the administration's spokespersons on the pending revisions to the law.
The Pension Benefits Guaranty Corporation (PBGC) filed a solicitation for help in negotiations with GM over its plans to spin off a portion of General Motors Acceptance Corporation, its financing subsidiary. The agency did the same thing in the UAL Corp's United Airlines bankruptcy. This is done as a precautionary move in the event GM files for bankruptcy.
The purpose of this solicitation to hire an attorney for the GM matter is so that the agency has a heads up start on all of GM's assets, in the event they must take over the pension obligations of the company in bankruptcy.
(2/26/06)- The PBGC holds a 23.4% stake in UAL Corp., the parent of United Airlines, making it the largest single shareholder in the newly reorganized company. It holdings consist of 11.1 shares of the common stock of UAL and 5 million shares of 2% convertible preferred stock. Before the stock was issued on Feb.2, the PBGC sold $2.5 billion of its claim for $450 million, or 18 cents on the dollar, to hedge funds and banks. The agency may receive some additional shares in the company under the reorganization plan as it unfolds down the line.
Pacholder Associates Inc. of Cincinnati, which the PBGC hired as a special assets manager in late 1999, is managing the stock for the agency. Pacholder was recently acquired by J.P. Morgan Chase & Co.
(2/14/06)- The PBGC will sell about half of the 20% stake in UAL Corp., the parent of United Airlines, which recently emerged from bankruptcy protection. The agency became an unsecured creditor and largest single shareholder in UAL after the company shifted $10.2 billion in unfunded pension liabilities to the PBGC during the Chapter 11 bankruptcy proceedings.
The agency usually does sell equity stakes it receives in companies during bankruptcy proceedings in relatively short time frames after it can first does so. With the sale of the stock, and the $1.5 billion worth of additional notes and preferred shares it is receiving, the agency will recover more that the seven cents on the dollar that it normally realizes as an unsecured creditor in bankruptcies
The PBGC will however be responsible for the pension obligations of UAL's 120,000 workers and retirees. It will only pay a maximum amount as allowed by the law, so that many of the pension plan owners will receive much less than they originally thought they would be getting.
The PBGC has filed suit to seize the pension plan of WCI Steel, saying the plan was more than $100 million short of the amount needed to cover the planholders. The move is the first step toward holding WCI's corporate parent, the Renco Group, responsible for the money.
The Renco Group is a privately held company whose assets include many profitable operations in addition to WCI Steel. Its holding include Fair Field, the Hampton estate of Renco's founder Ira L. Rennert, which has an assessed value of $185 million. The estate is in Sagaponack, L.I., and it was the subject of a recent article in the New York Times.
The estate is said to include 29 bedrooms, 39 bathrooms, a 164-seat theater, two bowling alleys, a restaurant sized kitchen, a 2.5 million B.T.U. furnace, and a parking garage that could hold 200 cars.
A lawyer representing Renco on pension matters, Garry M. Ford, said Renco would not fight the pension agency's action, which he said was necessitated by a group of creditors trying to dump the pension plan. Mr. Ford said that the company fully supported the PBGC's effort. The note holders hoped to have the bankruptcy court allow them to move the other assets of the company out of the steel company, and leave the pension plan in an empty shell. If that happened, the agency would lose its ability to have Renco's other assets cover the pension shortfall.
When a pension fund defaults, the PBGC has the power to go after the assets of any companies that are more than 80% controlled by the same corporate parent. In this case Renco has more than enough assets to cover any of the pension's shortfall. Renco does not contest the fact that it has more than enough assets to make the pension fund whole.
WCI Steel's actuary estimated in 2003 that the pension plan owed the steelworkers up to $282 million, but had only $93 million in assets. The PBGC estimates that the shortfall is currently $117 million short. The government is threatening to put a lien on the Rennert estate, but for its claim to be in effect it had to make it before February 6 in Bankruptcy Court in Akron, where the note holders' plan of reorganization is being presented.
(1/22/06)- United Airlines, a unit of UAL Corp. filed for Chapter 11 bankruptcy on December 9, 2002. With the approval of its reorganization plan by Judge Eugene R. Wedoff of Federal Bankruptcy Court in Chicago the company shall emerge from the bankruptcy proceedings on February 1, 2006. The proceedings lasted over 3 years making it one of the largest and longest airline bankruptcies in history.
The company, which is based in Elk Grove Village Ill., has kept flying during this whole period of time, but when it emerges from bankruptcy it will be a much changed corporation from the one that went into bankruptcy court. United ranks second to AMR Corp.'s American Airlines among domestic carriers. At one point in its history it had been the largest airline in the world.
It has cut over $7 billion in costs; eliminated over 25,000 jobs; abolished its defined-benefit pension plan and may have set the template for bankruptcy proceedings for GM and Ford if either one or both of those companies ever go with a bankruptcy proceeding. It cut over 100 planes from its fleet, cut back on domestic flights and expended international flights.
It eliminated traditional pensions and replaced them with 401(k) plans. The final battle in this area took place this week when its flight attendants ended a yearlong battle against the company and reached tentative agreement on a substitute retirement plan.
(12/19/05)- By a vote of 294-132 the House passed a bill aimed at shoring up the Pension Benefits Guaranty Corporation (PBGC). Negotiations between the House and the Senate, which passed a bill on this same topic in November, are expected to take place early next year when Congress reconvenes. The White House expressed its displeasure at the House version of the bill, just as it did to the Senate version of the bill.
One of the biggest differences between the House bill and the Senate bill is the lack of a special provision in the House legislation to aid the airline industry. The Senate version of the bill gives the airline industry 20 years to shore up their pensions while the House version of the bill allows only 7 years for all industries to shore up any pension liability shortfalls. The administration does not favor any legislation that would give any industry an exemption from any "shoring" legislation.
The House measure would push companies to try and keep a full dollar set aside in trust for every dollar of benefits they have promised to their employees. Under current law companies can call their pension plans fully funded when they have just 90 cents set aside for every dollar that they owe.
The House bill would require companies to give its workers more detailed information and up-to-date information about the health of their pension plans. Both the House and Senate version of the reform legislation would require companies to pay higher premiums to the agency to cover its workers.
In both versions of the bill the premium would be increased to $30 per month per employee from its present level of $19 per month per employee, which has been in place since the agency was formed in 1994. Under the House version of the bill the premium would be indexed to the rate of inflation in the coming years.
The House version of the bill would allow healthy companies to phase in the premium increases over a 5-year period of time. Companies with weak pensions would only have 3 years to phase in the premium increases.
The House bill would allow hedge funds to handle pension money without being subject to the legal safeguards that cover most financial institutions. There are presently 44 million workers whose pension plans are covered by the PBGC, which represents about 20% of the private workforce in this country.
Companies are required to make their next pension fund contributions by April 15th 2006.
(11/22/05)- The White House said that it would veto the pension reform legislation that was passed by the Senate by vote of 97-2. Two different committees in the House have sent to the floor measures that each one passed. The differences in the two measures have to go to reconciliation before the House can act on the measure.
Once the House passes legislation on this topic, the differences between its bill and the Senate bill must go to conference to resolve the differences. The Senate measure would require companies to close any shortfalls in their pension funds and gives most of them seven years to do so. The proposed bill does allow the airline industry 20 years to close the shortfall gap.
The Senate bill would require companies to stop paying lump-sum distributions if their pension assets fell below 60% of the total pension obligations. Another provision of the bill would require companies to report the strength of their pension plans to employees every year.
The Senate legislation would raise the fee to $30 per employee per month from its present level of $19 per employee where it has been at since the PBGC was first formed in 1974. There are about 34 million employees covered by the PBGC, so the rate increase would add an additional $374 million for the agency. Under-funded plans are required to contribute an additional $9 for each $1,000 of their pension-plan deficits.
The PBGC issued its report recently showing that its deficit in single-employer pension plans shrunk to $23.1 billion in the fiscal year that ended September 31 2005 compared with a deficit of $23.5 billion in 2004. This report however was issued with the caveat that the shortfall would have grown to $25.7 billion if it had included companies in it that terminated their plans after September 31.
"Unfortunately, the financial health of the PBGC is not improving," said Executive Director Bradley Belt. The agency absorbed 120 terminated company plans in fiscal 2004, with a total of $21.2 billion in liabilities owed to about 235,000 current employees, and $10.5 billion in assets. Northwest Airlines, Delta Airlines and Delphi Corp. have not decided yet as to whether to ask the bankruptcy court to shift their pension plans to the PBGC. According to the PBGC these companies have under-funded plans totaling over $15 billion in assets. The agency also stated that total under- funding of company's plans comes to about $450 billion.
When a company goes into bankruptcy the judge can only rule yes or no on any request that it may make to him to void the company's labor contracts and pension obligations. The judge can't mediate terms on these issues. The judge will appoint a referee to hold hearings and make a recommendation to him on these issues. Usually the company and its unions negotiate on these issues before turning the matter over to the bankruptcy judge.
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By Allan Rubin
Updated March 1, 2008
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