All Sorts of Companies Face Pension Shortfalls
Proposals Before Congress May Force Firms to Pump Even More Cash Into Plans
By Steven D. Jones
Dow Jones Newswires
The Wall Street Journal
July 6, 2005

Airlines struggling to meet promises to their retirees aren't alone, though headline scanners may be forgiven for thinking so.

In fact, companies of all different stripes are having problems with their retirement plans -- and proposals being debated by Congress could ground more pension plans.

Consider:  While four major airlines pensions plans collectively face a shortfall of nearly $13 billion, another 30 companies in manufacturing, trade, agriculture, finance and insurance are "underfunded" by $60 billion, according to Greg Kelly, Washington affairs analyst for Susquehanna Financial Group.

The tally for airlines doesn't include United Airlines parent UAL Corp., which last week turned over to taxpayers, via the Pension Benefit Guaranty Corp., responsibility for plans with nearly a $10 billion deficit.

 



The proposed reforms, which cleared the House Education and Workforce Affairs Committee last week, could compel companies to pump even more cash into their retirement plans.  The bill could next go to the House floor or be woven into other legislation.  Among its provisions, the bill aims to stop companies from projecting long-term health in their pensions when the hear and now suggests otherwise.

UAL, for example, told shareholders as recently as 2000 that its pension plans were "fully funded" on a long-term basis even though those same plans were billions of dollars in deficit on a "termination-liability basis," a description of what would happen were the airline to walk away from its responsibility to it -- which is what happened.

But United isn't the only company to have made such claims.  Bethlehem Steel claimed its pension was 84% funded, but on the tougher termination basis it was only 45% funded when it was handed over to the PBGC.  US Airways Group Inc.'s pilots pension plan was reportedly 94% funded, but when it was terminated it was only one-third funded.

Mr. Kelly said the Bush administration would like to see pension assets and liabilities both accounted for with current rates of interest and expenses, and although Congress may soften that stance it is still moving toward having companies contribute more to make up for pension shortfalls.  "Severely underfunded plans are going to have to pony up more money faster," he said.

Changes to rates that companies use to calculate future obligations mean many companies may face 10% to 15% increases in near-term pension obligations, so they'll have to increase contributions accordingly.

Some of the companies that could be hit hardest by the reforms include Maytag Corp., which has an underfunded liability of $554 million, or about 46% of its total market capitalization.  Another company, AK Steel Holding Corp., has $1.3 billion in underfunded liability, or one and a half times its stock market value.

A spokesman for Maytag said the company was following the pension debate but wouldn't comment.  Alan McCoy, vice president of government and public relations for AK Steel, said the company is "watching this issue with keen interest," but didn't have an estimate of what the reforms might cost.

Pension accounting includes a mind-numbing array of assumptions used to calculate future obligations and potential investment returns.  Layered on top of the assumptions are facts about changes in benefits, periodic adjustments in mortality rates, and actual gains and losses in pension assets.  Each year a company applies these factors to arrive at a total amount of credits and charges to its pensions.  If credits are greater than charges, under current law the company has met its minimum-funding requirement.

The proposed reforms would change the process a number of ways.

Currently, companies with underfunded plans can take a "holiday" from contributions if their pensions have a "credit balance" from large contributions in previous periods.  That loophole is likely to close, said Mr. Kelly.

Lawmakers also are seeking to reduce the influence of historic performance on future estimates of assets and liabilities.  Companies now look back five years to generate averages used to estimate future performance, which smooths pension returns.  Changes proposed by the administration would reduce that historic period to as little as 90 days, while Congressional proposals suggest four years.

And companies with a severe funding shortfall of 40% or more may be given as few as seven years to fill the void.

Taken together, the changes will sweep more U.S. corporations into the pension dog house, Mr. Kelly contends.

Eliminating credit balances in particular "would in our opinion be a disincentive to companies to contribute to their pensions," said AK Steel's Mr. McCoy.  AK Steel of Middletown, Ohio, is currently responsible for the pensions of 32,000 retirees and their dependents.

In January the company made a $150 million contribution to its pension plan, creating a credit balance the company may draw on to cover future contributions.  Mr. McCoy said knowing that cash was there in the future should the company need it was "philosophically...a consideration" in making the one-time contribution.

Changes in the law that would require larger contributions from companies with credit ratings of less-than-investment grade also would hit AK Steel hard.  The company was formed as a joint venture of the carbon-steel businesses of the former Armco Steel and Kawasaki Steel of Japan.  AK Steel went public as a separate company in 1994 and has never had an investment-grade credit rating.

"To further burden a company simply because it doesn't have a prime credit rating would almost be a self-fulfilling prophecy," Mr. McCoy said.

Write to Steven D. Jones at steve-d.jones@dowjones.com

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