Big 3 fear pension reforms

Big 3 fear pension reforms

Proposed plan would force beleaguered companies to pay more to guarantee retiree pay.

By Jeff Plungis / Detroit News Washington Bureau

WASHINGTON — In a move with great consequences for Michigan workers and retirees, Congress is moving toward legislation that will put even more financial pressure on beleaguered automakers and auto parts manufacturers to protect retiree pensions.

The pension overhaul legislation would force companies to fully fund their pension systems. But while most companies would be allowed several years to catch up, a provision in the Senate bill could have dire consequences for employers with poor debt ratings. Struggling companies such as General Motors Corp., Ford Motor Co., Delphi Corp. and Northwest Airlines would be required to pay their outstanding pension liabilities in a shorter time frame.

“Essentially, you’re kicking a company while it’s down, even though its pension plan might be sound,” said Darren McKinney, spokesman for the National Association of Manufacturers in Washington. “If the goal is to continue these kinds of pension plans, the legislation should not be making it more onerous to offer the plans.”

Pension reform bills have taken on new urgency with the recent bankruptcies of Delphi, Northwest and other companies, which have swept over Capitol Hill as a bleak warning about the financial health of American industry.

As more companies use bankruptcy to restructure and transfer their pension plans to the Pension Benefit Guaranty Corp., congressional leaders fear that taxpayers will soon be on the hook for a bailout similar to the savings and loan debacle of the early 1980s.

Congress created the PBGC in 1974 after 4,000 Studebaker-Packard Corp. workers were left without pensions when the automaker closed in 1963. The agency insures pension plans that provide workers with a monthly payment based on their wages and years of service.

The PBGC acts like an insurance company for pensioners when companies fail or choose to end their pension plans. The agency is funded by premiums paid by each employer who offers a pension plan. If a company defaults on its pension plan, the PBGC guarantees workers will receive a minimum pension payout.

But many now believe this social safety net is disintegrating. The gap between the agency’s obligations and assets has grown to an estimated $23 billion and could reach $100 billion within a decade.

If the PBGC defaults, taxpayers could be on the hook.

The PBGC’s financial problems are largely a result of bankruptcies in the steel and airline industries. Now with Delphi and other auto suppliers in bankruptcy, the auto industry has emerged as the greatest threat to the solvency of the PBGC.

The PBGC estimates that the pension plans of automakers and auto suppliers are underfunded by $45 billion to $50 billion.

Delphi has made no decision about terminating its pension plan. Delphi Chairman and CEO Robert S. “Steve” Miller says management wants to save the plan, but its fate depends on whether the company can negotiate lower labor costs with its unions and restore profits.

Other Metro Detroit bankrupt parts suppliers — including Federal-Mogul Corp. and Tower Automotive Corp. — have sought to or expect to transfer pension plans to the agency.

Amid the growing concerns, the House and Senate will vote next week on changes that will raise the cost of PBGC premiums paid by companies from $19 per worker to $30 per worker annually.

At the same time, both chambers are working on long-term overhauls of the pension system.

A plan backed by Senate Finance Committee leaders Charles Grassley, R-Iowa, and Max Baucus, D-Mont., would force companies with bad credit ratings to pump more money into their pension plans. The senators want companies to pay up before the plans are abandoned.

That could mean more cash contributions for companies like Delphi, GM, and Northwest, all pillars of the Michigan economy that meet Congress’ definition of corporations with pension plans in distress.

“It’s all designed to shore up the PBGC,” said Alan Reuther, legislative director of the United Auto Workers. “We believe it will lead to more bankruptcies, more plant closings and more companies walking away from their pension plans.”

Business groups say there is no direct link between the health of a company’s pension plan and its debt rating — the criteria the Senate Finance Committee wants to use to decide which companies have to make steep, catch-up pension payments.

GM, whose bonds were cut to junk in May, is among the companies lobbying against the measure that penalizes companies with bad debt ratings.

“Having the government make you put even more money into the plan while struggling down the road to recovery is like putting extra bricks in your backpack,” said GM spokesman Chris Pruess.

Manufacturers will be disproportionately affected by the change, said McKinney of the National Association of Manufacturers. Industrial companies are more affected by downturns in the economy, he said. That means their credit ratings may suffer. At the same time, he said, their pension plans might be well-funded, since funding levels are not always tied directly to a company’s operating performance and financial health.

Even though GM’s credit rating has been downgraded to non-investment grade and it is losing money, the company has nearly $20 billion in cash and securities, and its U.S. pension plans are overfunded by $1.5 billion. The PBGC, however, calculates pensions differently and says the company’s pension plan is underfunded.

The manufacturers say the new funding requirements Congress is weighing may accelerate the transfer of company pension plans to the PBGC.

The Senate came close to passing the pension plan two weeks ago. But the bill was pulled just before a planned floor vote when business interests objected. Since then, business groups have been waging a lobbying campaign for changes.

Business groups say companies should be given decades to properly fund their pension plans, since their obligations to retirees stretch out over a long time frame.

But moves companies have made to raise executive compensation — as Delphi did just before its bankruptcy filing — have made Senate leaders more determined to move forward with pension reform.

“Big businesses say they can’t afford to put money in their pension plans, but they’ve had no problem handing out huge salaries and special retirement plans for their executives,” Grassley said earlier this month. “At some point, Congress has to say enough is enough.”

Delphi’s pension plan was underfunded by an estimated $4.4 billion at the end of 2004. Under current rules, it faces a pension funding payment of $1.1 billion next year.

Another problem is looming. If no new measure is in place by Jan. 1, a temporary measure passed two years ago will expire and pensions law will revert to regulations that were in place before then. The old law — which used different standards to measure companies’ assets and liabilities –would force companies to make higher payments to their pensions funds.

Miller, who presided over bankruptcy restructurings at Bethlehem Steel, United Airlines and Federal-Mogul Corp., said the real problem is that companies made open-ended promises they could not keep.

“We are witnessing the slow, agonizing death of defined benefits as industrial compensation policy,” Miller said. “That is not all bad. These programs have a way of toppling traditional large employers.”

But Michigan Sen. Debbie Stabenow last week urged Miller to focus on national solutions to rising health care costs, pension woes and changing trade laws instead of dismantling union contracts and pensions. “My concern is the underlying assumption that we have to accept this race to the bottom, that we have to match Mexican wages …to match Chinese wages,” she said.

Bloomberg News contributed to this report. You can reach Jeff Plungis at (202) 662-8735 or jplungis@detnews.com.

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