GAO & PBGC WARN CONGRESS ON PENSION LIABILITIES.

Comptroller General David M. Walker and Steven A. Kandarian, director of the Pension Benefit Guaranty Corporation, warned a House committee Sept. 4 the nation's corporate pension plan liabilities had more than doubled since this time last year and could reach $80 billion by the end of the month.

In presenting the results of a study by the General Accounting Office he heads, Walker told the House Committee on Education and the Workforce the federal insurance program managed by the Pension Benefit Guaranty Corporation had experienced a high level of losses in 2002 due to the bankruptcy of companies with underfunded defined-benefit pension plans.

"The high level of losses could continue or accelerate if the economy recovers slowly or weakly, returns on plan investments remain poor, interest rates remain low, or the structural problems of particular industries with pension plans insured by PBGC result in additional bankruptcies," he said.

He also warned PBGC "might not receive sufficient revenue from premium payments and its own investments to offset the losses experienced to date or those that may occur in subsequent years."

Although he denied there was any "immediate crisis," despite PBGC being put on GAO's "high-risk list" at the end of July, he said PBGC faced "significant long-term risk."

Kandarian said the high level of losses had occurred in 2002 because the agency had taken over steel, airline and retail pension plans which were severely underfunded.

He said the terminated pilots' pension plan of US Airways had stated it was 94 percent funded, but PBGC found it was only 33 percent funded.

He said the amount of unfunded pension benefits PBGC had to cover by the end of 2002 totaled $35 billion and the total could rise to $80 billion this year. "In the worst case, PBGC's deficit could grow so large that the size of the premium increase necessary to close the gap would be unacceptable" to other participating companies," he said.

"If companies do not fund the pension promises they make, someone else will have to pay - either workers in the form of lower benefits, other companies in the form of higher PBGC premiums, or the taxpayers in the form of a PBGC bailout."

Both Kandarian and Walker urged the committee to tighten up the rules forcing companies to fund defined-benefit-retirement plans.

"We must make fundamental changes in the funding rules that will put underfunded plans on a predictable, steady path to better funding," Kandarian said. "Improvements...should set stronger funding targets, foster more consistent contributions, mitigate volatility and increase flexibility for companies to fund up their plans in good economic times."

Walker recommended improving the availability of information available to plan participants and others about plan funding, investments and PBGC guarantees, strengthening funding rules that apply to poorly funded plans and reforming PBGC by restructuring its benefit guarantee and premiums.

Committee Chairman John Boehner (R-OH) agreed the nation's defined-benefit plans are "in a precarious state" and said they raise "a serious question of whether a taxpayer bailout of the agency would be necessary if its financial condition continues to deteriorate."

Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX) said his "greatest fear is not the record deficits we're hearing about today," but "what we don't know about looming liabilities of plans on the brink."

Two years ago, Congress allowed companies to have a temporary reprieve from having to meet the current law which requires them to use the interest rate on the 30-year Treasury bond in calculating the present value of its pension liabilities.

Unless Congress acts quickly, the reprieve will end at the end of this year and companies will be required to make large contributions to their plans based on the Treasury bond rate.

Companies are urging the committee to adopt a higher, corporate-bond rate which would lower the size of their liabilities.

The Bush administration is pushing for another two-year temporary reprieve and then a three-year transition period before the new rule for calculating liabilities would take effect.

Rep. George Miller (D-CA), the committee's ranking Democrat, said he was "very concerned" the administration's approach "will drive pension deficits higher." He said the administration's approach had been "devised without the input of the PBGC and its rising deficit" and "without an understanding of what it would mean for the future of premium contribution hikes and liability claims."