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PENSION UNDERFUNDING INCREASED, PBGC SAYS

 WASHINGTON, Dec. 15 /PRNewswire/ -- Underfunding in pension plans insured by the Pension Benefit Guaranty Corporation (PBGC) increased to an estimated $51 billion as of Dec. 31, 1991, a 28 percent increase in underfunding from the previous year. Liabilities for underfunded defined benefit plans totalled about $214 billion and assets totalled about $163 billion.
 "While most pension plans remain well-funded, pension underfunding continues to grow among plans in certain industries and as a result the pension insurance program faces growing claims. The increase in underfunding underscores the need for legislative reforms to improve employers' incentives to better fund their pension promises," said PBGC Executive Director James B. Lockhart.
 The most recent figures show that underfunding among single- employer plans insured by PBGC has grown to about $40 billion, from the $31 billion reported last year. These underfunded plans had liabilities of about $162 billion and assets totalled about $122 billion. Approximately 70 percent of the underfunding is concentrated in plans sponsored by just 50 companies, primarily in the automobile, steel, airline, and tire industries. Moreover, about 30 percent of the underfunding is owed by financially troubled companies and constitutes reasonably possible losses to PBGC.
 The increase in underfunding occurred despite very strong investment returns in 1991. This increase reflects the effect of falling interest rates and, to some extent, benefit increases, which were not totally offset by investment returns and increased contributions in 1991. Because benefits are often increased at intervals as part of union negotiations, new liabilities are added before old ones are funded, leaving some bargained plans chronically underfunded.
 Approximately $11 billion of the overall pension underfunding is in multi-employer plans, an increase of about $3 billion from last year, based on liabilities of about $52 billion and assets of about $41 billion.
 Lockhart cautioned that the underfunding figures for the single- employer program may be understated for termination purposes. PBGC's experience shows that plan funding deteriorates substantially as it approaches termination. Typically, a plan is 40 percent funded when it terminates but had been reporting 60 percent to 80 percent funding five years before. There are several causes for this deterioration in funding:
 -- Financially pressed companies forego required pension contributions while in bankruptcy with judges' approval, as did Continental Airlines and CF&I Steel, or allow a plan to run out of money without violating the minimum funding standards, as did LTV Steel and Blaw Knox Steel. Furthermore, the law gives a company considerable latitude in the interest rate, retirement age and mortality assumptions it uses to determine its required contributions.
 -- Distressed companies often encourage early retirement to cut their payroll. They may also close plants and lay off employees, triggering special subsidized early retirement benefits, which are rarely, if ever, funded in advance.
 -- Troubled companies also offer pension increases in lieu of direct increases in compensation since the cost of the additional pension benefits may be deferred. Despite the fact that a substantial portion of the new benefits may not be funded for a considerable period of time, workers are willing to accept the increased benefits since they are backed by federal pension insurance. For example, both TWA and Continental Airlines amended their pension plans while in bankruptcy adding over $100 million to their already substantial pension debts.
 -- Lenders rarely put pressure on companies to better fund their plans, believing in optimistic funding assumptions and expecting pension claims will have no priorities in bankruptcy. On the contrary, creditors are more likely to pressure distressed companies to terminate plans rather than fund them.
 PBGC is a federal corporation created by the Employee Retirement Income Security Act to guarantee payment of basic retirement benefits earned by American workers participating in private defined benefit pension plans. PBGC administers two insurance programs, which cover more than 40 million workers in about 85,000 pension plans.
 -0- 12/15/92
 /CONTACT: Judith E. Bekelman, director of communications and public affairs, or Andy Gasparich, public affairs officer, Pension Benefit Guaranty Corporation, 202-778-8840/


CO: Pension Benefit Guaranty Corporation ST: District of Columbia IN: INS FIN SU:

DC -- DC015 -- 7277 12/15/92 14:16 EST
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Publication:PR Newswire
Date:Dec 15, 1992
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