WASHINGTON - The Pension Benefit Guaranty Corp.'s annual report on companies with the worst funded pension plans will show some pension funds in poorer shape than they actually are.
"The truth is that the underfunding is down and the data are stale," said Gary Ford, former PBGC general counsel. "Underfunding has gone down but (companies) still get hammered on the list."
The report, due out soon, is a rundown of the nation's most underfunded plans, based on 1993 information.
Since the Top 50 list's inception, plan sponsors have been complaining of the overly conservative interest rate assumption used in valuing liabilities. The PBGC's assumption is one that would have been used to purchase an annuity if the plan terminated at the end of 1993. Companies use a rate that assumes the plan is ongoing. According to a 1993 Buck Consultants report on pension plans, 92% of companies used a rate from 7% to 7.75%, where the PBGC used a 5.65% rate.
True, pension plans in general are doing better today because of the rise in interest rates, but more importantly, many plan sponsors believe the list does an injustice because it publicizes the 1993 numbers without counting the contributions made for the 1994 plan year.
Plan sponsors have until Sept. 15, 1994 to make contributions to count for the 1993 list, which is expected to be issued soon, a PBGC spokeswoman said.
Labor Secretary Robert Reich said at a recent press conference that pension funds did not fund benefits when they could have during this economic recovery period. But executives of several underfunded plans disagree.
For example, General Motors Corp., which the PBGC said had the most underfunded plan last year - at $20.2 billion - contributed $5.2 billion this year to its hourly plan. In 1994, it satisfied its minimum funding requirement of $1.9 billion in its first quarter contribution. What's more, General Motors Investment Management Corp., New York, which oversees the company's pension funds, is awaiting Department of Labor approval on a $10 billion infusion of cash and stock.
"We're making progress - substantial progress - in reducing our unfunded position," a GM spokeswoman said. "Their list is 12 months old, and I'm sure we're still on it."
Chrysler Corp., Highland Park, Mich., carried a $1.4 billion unfunded liability in 1992, according to the PBGC. It contributed $3.5 billion in 1993, a Chrysler source said. The company's goal is to fully fund the plan by the end of this year and it expects to be off of the PBGC's list, he said.
Among other plans on last year's list that contributed more than their minimum funding requirements:
Westinghouse Electric Corp., Pittsburgh, expects to contribute $300 million above its minimum funding requirement in 1994.
The LTV Corp., Cleveland, contributed $1.4 billion in 1993, and plans to contribute $579 million in 1994. An LTV spokesman said the steel company, after it emerged from bankruptcy in early 1993, went from 0% to 65% funded in 22 months.
Bethlehem Steel Corp., Bethlehem, Pa., contributed an additional $632 million to its pension plan in 1993 and 1994. Gary Millenbruch, executive vice president, said assets increased $34 million to $3.4 billion between December 1993 and September 1994, while liabilities decreased $334 million to $1.2 billion.
American National Can Co., Chicago, contributed $110 million above required amounts from 1991 to 1994.
PacifiCorp, Portland, Ore., contributed about $35 million above the required amount in 1994. "I do understand why (the PBGC does) the list - there is some value, but it can be misleading for companies that are not a threat to the PBGC," said Dan Rosborough, director of benefit planning at PacifiCorp.
The PBGC would not release the Top 50 list before press time, but officials said underfunding for all single-employer pension plans increased 34% to $71 billion in 1993. The increase mostly was due to historically low interest rates, Mr. Reich said at a press conference. The PBGC used a 5.65% interest rate assumption - the December 1993 assumption used to value annuities - to value assets and liabilities, said PBGC Executive Director Martin Slate. In 1992, a 6.4% interest rate was used.
Some argued the difference in the 1993 liability was due to the change in the interest rate assumption used. Kathleen Utgoff, former executive director for the PBGC, said a one percentage point increase in the interest rate assumption generally increases liabilities about 20%.
But Mr. Reich contends even if interest rates were held constant, underfunding would not have improved. Underfunded pension plans in 1993 had $316 billion in assets and $387 billion in liabilities, the PBGC reported. In 1992, underfunded plans had assets of $182 billion and liabilities of $235 billion.
Mr. Reich did say about 75% of pension plans are well funded and do have the assets to pay benefits. But pension underfunding affects about 8 million workers and retirees in defined benefit plans. The PBGC covers nearly 41 million workers.
Underfunding continues to be concentrated in the steel, auto, tire and airline industries, Mr. Reich said.
But plan sponsors have two large incentives to get liabilities off of the books. First, the liability is carried for accounting purposes as debt and could affect a company's credit rating, said the PBGC's former general counsel Mr. Ford, who now is an attorney with Groom and Nordberg, Washington.
Secondly, new rules passed by Congress earlier this month will speed up underfunded pension plans' funding schedule and raise premium payments made to the PBGC.
Bethlehem's Mr. Millenbruch said premium payments would double to about $17 million at the end of the phase-out period. The company expects to be about 80% funded by the end of this year, so it would not be affected by the faster funding schedule, he said.
The rise in interest rates should help plan sponsors decrease liabilities, said Richard Joss, resource actuary at The Wyatt Co., Washington. Late 1993 was an unusually low period for interest rates, hovering around 7.3%, he said. The Federal Reserve Board's increases this year have upped interest rates about 200 basis points.
But most believe the PBGC could grab the public's attention to unfunded pension plans in a different way, one that wouldn't hurt plans that are trying to solve the problem.
"Somehow, if companies are making progress toward an objective that's consistent with (the PBGC's), then I think it's counterproductive to be exposed on this public listing," Mr. Millenbruch said.
