The Pension Benefit Guaranty Corp., the safety net for the 42 million Americans in corporate pension plans, announced this month it is ceasing to publish or even compile the Top 50 list of underfunded pension plans. The list was an extremely effective, non-regulatory tool, but much hated by companies that were on it and, surprisingly, by unions. The media covered its annual publication and Institutional Investor cited it as one of the top financial events of its first 25 years. The PBGC is finally solvent in its 23rd year and the corporate pension world is healthy. If the list's time is gone, so might be the PBGC's.
When in 1990, as the PBGC's executive director, I made the decision to first publish the list, the PBGC had a deficit net worth of $1.9 billion and often was cited as the next savings-and-loan-type crisis. Underfunded pension plans were dragging down into bankruptcy major corporations, especially in the steel and airline industries. There seemed to be a silent conspiracy for unions to bargain for and companies to grant pension increases they could not afford because there was a "government guarantee."
As we hoped, the list provided strong moral suasion to counteract the moral hazards of government insurance. The list raised workers', retirees', managements', and directors' awareness of risks of underfunded pension plans. Many companies on the list made extraordinary contributions totaling in the tens of billions of dollars to better or fully fund their pension plans and, not coincidentally, get off the list.
The list, plus the many other actions taken by the hard-working PBGC team and the strong financial markets, helped engineer a dramatic turnaround from a peak deficit net worth of $2.6 billion to a positive net worth of $1 billion at the end of fiscal year 1996 and probably $2 billion for fiscal 1997, which ends this month. It also helped lay the foundation for much delayed reform legislation finally passed by Congress in 1994. Companies with poorly funded plans must now pay higher premiums, better fund their plans, inform participants of the underfunding and provide the PBGC with better information. Perhaps, the list caused its own obsolescence.
The criticism of the list when first published was vehement. It was lambasted for relying on imprecise public information and for emphasizing the biggest and not necessarily the riskiest underfunded plans. It is ironic that now the PBGC has better information, it is not making the underfunding information public. The list emphasized size because the biggest 50 companies out of the 50,000 covered plans were going to make or break the PBGC. Only a dozen or so companies over the PBGC's existence caused its black hole.
With the PBGC's dramatic turnaround, the strong bond and stock markets, aggressive negotiating and litigating posture, pension reforms and the general acknowledgment that pension underfunding is risky, maybe the time for the list has passed. As pensions are lifetime assets, two good years might be a little premature to declare victory and eliminate this effective tool.
I hope the reasons for the demise of this list that is hated by the unions are related to the PBGC's health and not politically motivated. It is curious that this decision was leaked just before Labor Day and that it is the first significant act of the PBGC's new and first overtly political executive director, David M. Strauss, a former deputy chief of staff to Vice President Gore. I hope the silent conspiracy will not re-emerge.
If the time for the list is gone, the time for the PBGC also is gone. It should be privatized. The government status always was somewhat of a sham as there is no government guarantee behind the PBGC and only a relatively small line of credit. It is in reality a mutual insurance company funded by investment income and corporate premiums that have skyrocketed since the PBGC's creation. The federal government treats these premiums as income (taxes) to reduce the deficit while ignoring the losses of terminated pensions. That cash flow accounting, which the Bush administration tried to change to generally accepted accounting principles, is actually a big stumbling block to privatization as the government could no longer count the billions of dollars as its own.
The Clinton administration talks about privatization. If it is serious about privatization, it should pursue privatization of the PBGC. With $13 billion in investible assets, it could be an attractive property. Privatization will not be easy, but there are several options to consider. The PBGC could be "mutualized" by selling shares to its corporate premium payers. Alternatively, the PBGC could be sold to a company or in a public offering. The financial guarantee and annuity insurance functions could be done by or sold to other insurers. A new insurance contract based on sound actuarial principles should be created.
The effort would be worth it. The PBGC's privatization would eliminate the politics of pension insurance and the moral hazards of a government insurance program that at one time was threatening to require a taxpayer bailout. Like many non-core government functions, the PBGC is only well understood by a few members of Congress with the result that necessary changes are slow and blunt. Privatization would reduce government involvement in mergers, divestitures, acquisitions, bankruptcies and equity markets. Privatization would return to the private sector the pension insurance function and place responsibility where it belongs. Workers' and retirees' pensions will be protected by realistic promises backed by sound insurance.
