Pension Bailouts

Nothing should surprise us these days, I suppose, but I was still taken aback by the AP article, "Companies push Congress for pension relief". Apparently, some 300 companies are pressuring Congress to suspend pension legislation passed only two years ago.

Underfunding defined benefit pension plans used to be a favorite way for companies to inflate earnings. Since this is a corporate expense, for every dollar that a company doesn't put in a pension fund, there's one more dollar of reported earnings. Underfund your pension, and all of a sudden you're no longer a mediocre CEO; you're a financial genius, and entitled to that $ 20 million annual bonus.

All this became a lot more difficult a couple of years ago when the Pension Protection Act of 2006 became law. By the way, Iowa Sen. Chuck Grassley should be commended for his leadership in gaining passage of this legislation.

It seems fairly simple: if a company promises its employees a pension, they must set aside funds to meet this obligation. The law requires companies to gradually raise their "funding target" for pension plans from 90 percent (the amount required before the PPA) to 100 percent over seven years.

The law doesn't force companies to offer traditional (defined benefit) pension plans and in recent years many companies have replaced these plans with defined contribution plans, such as 401(k) plans, which cost less. The law simply requires that they adequately fund commitments they've already made to the 44 million people (working and retired) that are still covered by traditional pension plans.

So how is this a bailout? Qualifying pensions are insured by a government agency called the Pension Benefit Guaranty Corporation (PBGC). They're already forecasting a deficit of $10 billion to $12 billion, as of September 30, 2008, so with the likelihood that additional companies will go bankrupt over the next few years, they don't really have a reserve. Taxpayers will need to make up the difference for companies that have underfunded their pensions.

Prior to the law, the PBGC estimated that plans of financially weak companies with a "reasonably possible" chance of bankruptcy or termination had plans with an estimated $96 billion in underfunding. I suspect the number would be higher today, and suspending requirements that companies adequately fund their pensions just makes the tab the PBGC will need to pick up that much bigger.

We only have the names of a few of the 300 companies that have joined in asking that these pension rules be suspended, but I suspect many are like Pfizer ($10.5 billion profits last year) and IBM ($11.4 billion profits last year). Many of these companies continue to pay high dividends to shareholders even as they ask for permission to underfund their pensions.

I can't wait to see if Exxon Mobil is on the list, after just reporting record profits a few weeks ago.