The most recent of the commentaries by David Langer in Pensions & Investments (Jan. 8) was once again misleading. He should be chronicling the dramatic turnaround at the Pension Benefit Guaranty Corp. A potential crisis was averted. Stitches in time did save nine (billion).
Mr. Langer's major criticism seems to be that I and many others - including the General Accounting Office, Congressional Budget Office, Office of Management and Budget, and the Atlanta Federal Reserve Bank - pointed out the potential for a very bleak future for the PBGC if steps were not taken to improve the insurance program. Given the time and the fact that the PBGC was modeled after the FSLIC, it was impossible to escape the savings-and-loan analogy. We repeatedly said S&L-type crises could be avoided and laid out an action plan to achieve a financially strong PBGC.
The steps included a strong negotiation and litigation posture that prevented billions of dollars in potential losses in such cases as LTV, TWA, Western Union and Eastern Airlines. Just as importantly, we highlighted the risks of underfunded plans to participants and sponsors through a non-regulatory approach in the much-maligned "top 50 list" of underfunded plans. Yes, the actions needed publicity to educate participants, strengthen negotiating positions and bring about reforms.
Steps had to be taken internally as well to prevent a breakdown as losses skyrocketed. These steps included a revised investment approach, new internal controls, better monitoring and collection of premium receivables, more responsive handling of terminations, new systems and auditable accounts. We also wanted to instill a bottom line, service-oriented corporate culture as a means to solve the then-internal problems and prevent a recurrence.
The agenda was long term and very ambitious, but happily my successor, Marty Slate, adopted most elements of the plan and continued to carry it out. Unfashionable as it is to say about the government and the Bush administration, it worked. Much of the success was due to applying private sector approaches to the PBGC's problems. It may be too early to declare a total victory, but a crisis has been prevented, admittedly with the help of a strong economy and investment markets:
Unfunded guaranteed benefits dropped two-thirds to $13.5 billion in 1994 from $39.7 billion in 1993, reflecting the impact of the markets and the massive extraordinary fundings by several companies, including GM and Chrysler, to avoid the stigma of being on the list. Publicity does work. Hopefully, companies and their directors, workers, retirees and unions now have a better understanding of the risk of underfunded plans to corporate solvency and retirement security.
The PBGC's annual numbers are now auditable and certified by the GAO.
The PBGC's new investment policy of asset/liability management, which has been criticized previously by Mr. Langer, has been very successful.
Under proper accounting, the net worth deficit should now be approaching zero.
There were other issues in Mr. Langer's article that should be refuted as well:
Financial reporting. Mr. Langer has harped for years about the quality of the PBGC's annual report and its numbers. To point out the obvious, once again, the PBGC is an insurance company and not an underfunded pension plan. As an insurance company, it must follow generally accepted accounting principles, which it does. Likewise, the quality of the information provided in the annual report has been recognized by awards for the best government annual report. Admittedly, the numbers move around from year to year because the PBGC's exposures are large as it insures a trillion-dollar defined benefit system. One question he should have asked is why for the first time does the president's picture (Clinton's) appear on the cover of the 1994 annual report. Is it a sign of creeping politicization of the PBGC?
Expenses. Unfortunately, preventing major losses, catching up on backlogs and correcting years of financial controls and systems neglect did not come cheaply. Even though the expense ratio of 13% is still low for an insurance company and the complex rules of government procurement are not helpful, it is an area requiring constant vigilance. I agree with Mr. Langer that expenses deserve scrutiny. It is a reason to install a corporate bottom-line culture.
TWA. It was one of the toughest decisions made. It points out the flaws of the PBGC system that could have caused a major crisis. Weak funding rules (which were strengthened under the GATT legislation) and questionable court rulings allow big black holes to be created. Of course, there were concerns expressed by many parties: pensioners, unions, politicians and TWA's 25,000 employees. A judgment had to be made whether it was better to keep the pension plan ongoing with the hope underfunding would drop over time or terminate the plans to pursue over many years expensive litigation against Carl Icahn and a defunct TWA. After very tough negotiations, the PBGC was able to obtain significant protections from Mr. Icahn. TWA continues to fly and pay pensions.
The PBGC Advisory Committee. It is not legally allowed to make decisions. When I was there, we welcomed its advice on legislation, regulations, investments and financial matters. Given its mandated diversity, opinions were often divided. The PBGC should consider a reform we proposed of naming a board of governmental and non-governmental directors.
Although much brighter, the PBGC's future is still uncertain. The business it insures (defined benefit plans) is not growing. Mr. Langer is right that more should be done to encourage plan formation and retention. Trying to reduce unnecessary, intrusive regulations is one way. Encouraging innovation in plan design should continue. Congress should pursue the recently vetoed legislation allowing well-overfunded plans to reclaim part of the excess funding. As long as it remains part of the government, especially under present cash flow accounting, it can be politicized to the detriment of premium payers.
Given the progress the PBGC has made, the right answer for its future is to privatize a major part if not all of its functions. It will not be easy to pry the PBGC loose, as not unlike Social Security the PBGC's $1 billion of premiums go to reduce the budget deficit and its $10 billion of liabilities are ignored. The private market will be able to better design, price and underwrite the insurance than Congress can. For some companies it will produce the premium reductions Mr. Langer suggests, but for others, premiums would no doubt increase to reflect the real risk.
James B. Lockhart III
Editor's note: Mr. Lockhart was PBGC executive director from 1989 to 1993.