Sunday, October 26, 2008

Pension Benefit Guaranty Corporation and pension reporting system (and ERISA) need subtantial reform; $100 billion bailout looms


A University of Illinois finance professor, Jeffrey R. Brown, warns that the next big bailout could be of our whole pension system. The Pension Benefit Guaranty Corporation (PBGC) is underfunded. The amount of underfunding was $14 billion a year ago, and is likely much higher now. Brown thinks a taxpayer bailout could amount to $100 billion in a short time.

The article appeared Oct. 15, 2008 in the University of Illinois New Bulletin (from Champaign-Urbana). The link is here.

This blog covered the way PGBC works with a Sept. 16, 2008 blog entry, right after the Lehman Brothers crash. PGBC can force an employer to terminate a plan, but normally it requires employers who want to terminate to set up replacement annuities for pensiorers.

The experience of retirees after PGBC takeovers has been mixed. There are maximums that will be paid, but some retirees have been fortunate enough to continue receiving close to all of what they received before. Common sense says that could go south during the current crisis.

The problem is that pension funds invest in stocks and bonds and various instruments the way other institutions do. Pension fund managers are under pressure at work to show short term returns. That could have encouraged risky investments, just as it did in the securities industry as a whole. The plain truth is that “professional investors” invest other people’s money in a short-term, quota-driven environment and make investments that individuals probably would not make on their own. Would you invest your own money on buying mortgages for unqualified applicants? Probably not. But if you did it for a living (with other people’s money) you might feel pressured to. That’s part of the tremendous crisis in business ethics in our society, that David Callahan wrote about in “The Cheating Culture.”

So pension funds have seen their assets go down, probably more than “Joe the Plumber’s” own 401K. That means that companies have to make up the difference, which, in some cases, could drive them into bankruptcy and either voluntary or forced termination of the plan. That could be another reason why stock market valuations have sunk so much recently.

Pension plans are often set up based on the constituent businesses that larger holding companies (as they are traded on exchanges) have combined. Life insurance holding company stocks may be tanking because of the credit crunch, but individual companies would be all right, except for the fact that individual companies themselves were investors in the market. While there are regulations that provide some safety, it seems as they were not adequate. So one way another, the companies (or their holding companies) will have to buttress their pensions for possibly face terminations. If this happens enough, the PGBC itself will need a bailout.

Brown suggests reforming the system, requiring employers to purchase private insurance for their funds, based on rated risk, rather than flat fees. He believes that reporting to retirees of fund health needs to be much more transparent, and possibly be available online rather than just in once-a-year statements that are usually badly outdated.

1 comment:

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