NEW YORK - It will cost corporate America plenty to shore up the nation’s private pension system. But judging by what happened at United Airlines, it’s looking like an expense taxpayers could eventually have to pay.
Just a month ago, the bankrupt airline dumped nearly $10 billion in pension obligations on the federal government, making it the largest corporate pension default in U.S. history.
Current pension funding rules allowed United to make its retirement plans look as though they were in much better shape, and didn’t require the airline to make any cash contributions in recent years despite its pension plan’s declining health.
From that example alone, it certainly seems like a pension system overhaul is a must.
‘‘We may be approaching a tipping point for defined benefit pension plans,’’ said David Zion, the accounting analyst at Credit Suisse First Boston. ‘‘The accounting rules and funding rules have protected companies from their pension plans for a long time.
‘‘With the use of smoke, mirrors, and various smoothing mechanisms, these rules make it appear as if the plans are not volatile, when they really are, and make plans appear healthier than they really are.’’
Defined benefit plans, which promise retirees a monthly check and often health coverage, were underfunded by $354 billion through April of this year, meaning their liabilities far outweighed their assets. That’s a 27 percent increase in the shortfall compared with a year ago, according to the Pension Benefit Guaranty Corp., the federal agency that insures pensions.
At UAL Corp.’s United, the carrier is terminating pension programs covering 120,000 active and retired workers to help it emerge from bankruptcy court protection. United’s pension funds have $7 billion in assets, but benefit liabilities total $16.8 billion. Of that $9.8 billion difference, the federal agency will cover $6.6 billion, meaning benefits for United’s retirees will be considerably less than if the plans were still active and healthy.
But going back, it becomes clear that the situation at United didn’t have to turn out this way. According to recent testimony to Congress by Bradley Belt, the federal agency’s executive director, the financial health of United and its pension plans had been deteriorating since at least 2000.
As you might expect from a financially distressed business, United put little, if any, cash into the plans — something that was perfectly legal under pension funding rules. Nor did it provide any notice of the severe underfunded condition to its participants.
‘‘Current funding rules are demonstrably flawed. Simply put, they have failed to ensure that companies make good on the commitments they make to their workers and retirees,’’ Belt said.
With cases like that in mind, there is a push in Washington to overhaul the pension system. Among the biggest changes under consideration is to create more stringent funding requirements for calculating how much money companies must contribute to their plans and the schedule to make payments.
There are also proposals to require companies to use the fair market value to measure pension assets, rather than an actuarial estimate that may not be tied to reality, and to tie funding requirements to a company’s financial health, based on its credit rating.
Such changes could prove very expensive, doubling or tripling this year’s contributions for some companies.
That’s the findings of Zion, who combed through financial filings for companies in the Standard & Poor’s 500 to determine how much possible changes in pension regulation could cost corporate America if they were in effect this year.
He estimates that S &P 500 companies would have to pay $41 billion to their plans this year if pension reform was fully phased in for 2005. That’s about 28 percent higher than the $32 billion those companies were expecting to contribute.
Of the 373 companies in the S &P 500 that have defined benefit plans, he estimates that costs would rise for 217 of them. Of those, 92 could see their contribution more than double, including 14 that would have to boost their contributions by more than $100 million each. Among them: General Motors Corp., Delta Air Lines, Xerox Corp. and Cigna Corp.
With such whopping bills on the radar, it isn’t surprising that business groups are warning that a pension overhaul would put serious strain on companies that offer pensions, and would mean that many companies would have to divert money away from investments in their business to cover the costs.
There is also talk about how this could accelerate the move by companies to lessexpensive defined contribution plans or to stop offering pensions altogether.
Now suddenly pension plans are being talked about as costing too much, when all along the costs were there — companies just chose to ignore them. The big question is whether companies step up to the plate now, or whether there will be more cases like United Airlines, with the federal agency — and ultimately taxpayers — on the hook.