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  2. REGULATION AND LEGISLATION
December 12, 2011 12:00 AM

Strengthening PBGC

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    Roger Schillerstrom

    The Pension Benefit Guaranty Corp. faces a confluence of severe challenges, including a new inspector general report critical of its oversight of the United Airlines pension plan termination, one of its largest plan takeovers, and the recent bankruptcy filing by American Airlines' parent that threatens to drop into its lap pension liabilities that could be at least as large as United's.

    Other daunting issues the PBGC faces include its worsening deficit — which reached a record $26 billion in its fiscal year report released in November — and its stalled effort to increase funding by obtaining congressional authority to raise premiums.

    The challenges raise doubts about the past oversight and management of the government pension insurer, and its financial underpinnings, all testing its ability to carry out its mission to support benefit promises of failed private-sector pension plans.

    Unfortunately, in many of these cases, the PBGC hasn't been up to the task in dealing with them.

    Partly, it is the fault of Congress, which saddled the agency with an inadequate and inflexible funding mechanism.

    Partly, it is the fault of a weak governance structure, with a board whose three members — secretaries Timothy F. Geithner of the Department of the Treasury, Hilda L. Solis of the Department of Labor and John E. Bryson of the Department of Commerce — have other duties to which they usually give greater priority. Historically, the board rarely has met to deal with the oversight of the PBGC.

    Partly, it is the fault of poor management and operations, resulting in loose controls and an entrenched culture that needs changing.

    All these areas should be strengthened or changed. Although the massive deficit will remain a challenge, these improvements would enhance the ability of the PBGC to move toward stabilizing its financial situation and even improving it.

    Some of the steps, such as improving governance and raising PBGC funding, require congressional action.

    But the PBGC management can take important steps on its own to improve its oversight and contribute to improving its financial situation.

    Joshua Gotbaum, PBGC director since July 2010, has the skills and experience to deal with distressed situations like that of the agency. He acquired a reputation as a fix-it talent in dealing with turnarounds, working as an investment banker with Lazard Freres & Co. and as a partner with Blue Wolf Capital Partners LLC, advising companies, unions and governments on mergers, acquisitions and restructurings.

    As a Chapter 11 bankruptcy trustee, he oversaw the reorganization of Hawaiian Airlines, keeping its defined benefit plan when it emerged from bankruptcy proceedings. This experience alone should help him ensure the American Airlines situation does minimal damage to the PBGC.

    The AMR Corp. bankruptcy filing doesn't necessarily doom its pension plans to termination, as the Hawaiian Airlines example shows. Also, when Delta Air Lines Inc. reorganized under Chapter 11 protection in 2006, it kept one pension plan, while the PBGC took over a pilots plan, assuming $920 million of a total $3 billion underfunding.

    And, Northwest Airlines Inc. filed for bankruptcy protection in 2005, when its plans were $5.7 billion underfunded. It froze its plans for pilots and other salaried employees and other union employees between 2005 and 2006. Delta and Northwest merged in 2008 under the Delta name.

    Mr. Gotbaum's depth of experience can provide critical leadership to strengthen the PBGC's operations to repair the deficiencies the inspector general's report found.

    The report by Rebecca Anne Batts, the PBGC inspector general, found among other issues, that pervasive weak internal controls led to erroneous plan asset valuations and pension benefit calculations at United Airlines and other terminated plans when the PBGC assumed responsibility.

    This resulted from poor management of contractors involved in valuing the assets of terminated plans, and led to the United Airlines valuations being “seriously deficient,” the report said.

    For example, Ms. Batts called the $8 billion valuation made by Integrated Management Resources Group, a contractor PBGC hired to work on four United Airlines defined benefit plans, “not a reliable number.” It has not been determined yet whether that $8 billion figure is too high or too low.

    Mr. Gotbaum, in a written response to the inspector general's concerns, said PBGC officials “recognize and concur with your opinion on internal controls,” and said earlier weaknesses were being addressed.

    In 2005, the PBGC declined to take up an offer to conduct forensic audits of terminated plans to determine what, if any, responsibility for underfunding was attributable to conflicts of interests of money managers and consultants in overseeing plans, a review that could have led to litigation to recover losses. It should reconsider that stance.

    Swift action to correct the deficiencies reported by the inspector general and shore up the PBGC management controls would improve its standing with Congress and in corporate America in advocating better funding to finance the benefits of pension plans.

    It might encourage corporate plan sponsors and Congress to embrace, as they should, Mr. Gotbaum's proposed credit-rating-based premium structure by showing PBGC funding is used efficiently and effectively, and not squandered.

    At the same time, Congress must to step up to restructure the board, which would improve oversight of management.

    The PBGC board failed to meet at the time of the financial market crisis, or during the investigation of Charles E.F. Millard, a former PBGC executive director accused and later cleared of making inappropriate contacts with investment management firms the agency was considering hiring.

    If the board doesn't see fit to meet during these situations, it is a non-functional board and must be replaced.

    The Pension Benefit Guaranty Corporation Governance Improvement Act, introduced in 2009 by Sen. Herb Kohl, D-Wis., would have amended the Employee Retirement Income Security Act to expand the board to seven members from the existing three.

    While no action was taken on it, the ideas in the bill would still serve as a good starting point for new legislation to restructure the board. Legislation should require the board to have appropriate expertise for the board's oversight responsibilities. It also should create investment and audit committees to enhance oversight. In another improvement, Congress should remove the three Cabinet secretaries, who have other priorities, and find another means for the three departments to oversee PBGC accountability.

    The record deficit will remain a challenge for the PBGC, but these steps will offer a better chance to move toward stabilizing the PBGC and improving funding so it can better ensure its ability to insure pension benefits.

    Related Articles
    Audits call PBGC 'seriously deficient'
    AMR bankruptcy has PBGC primed for a battle
    Audits call PBGC 'seriously deficient'
    AMR bankruptcy has PBGC primed for a battle
    PBGC woes not likely to change
    Rescue is no way out pension plan underfunding
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