Yesterday’s post mentioned the New York Times story on United Airlines’ delay of contributions to its defined benefit pension plans – allowed because of the peculiar “crediting” system of allowing past contributions to count toward current requirements, even if the assets have evaporated into thin air.
It was an interesting real-life illustration of what the Government Accountability Office discussed in their report on chronic underfunding of these plans. Yesterday, Senate hearings were chaired by Sen. Charles Grassley of Iowa, and an analysis of the United situation was offered by Bradley Belt, the executive director of the Pension Benefit Guaranty Corporation.
According to Belt:
“During the period from 2000 onward, when the true funded status of each of the company’s pension plans was deteriorating and the financial health of the company was becoming more precarious, the company:
* put little if any cash into the plans;
* rarely made a deficit reduction contribution;
* never provided any notices of underfunding to participants; and
* almost never paid a variable rate premium.
Yet the company still could claim that their plans were “fully funded” on a current liability basis.”
You know the rest of the story: United dumped its severely underfunded plans on the PBGC, which is chest-deep in underfunded plans and will need a bailout of its own. Belt pinned the blame not so much on the company, but on the nonsensical rules on “credits” for previous contributions and the smoothing mechanism for averaging pension assets and obligations. (For determining funding requirements, plan assets can be averaged over five years and obligations over four years.)
Belt’s criticism of the technique is on the mark:
“Those who want to retain these mechanisms argue that it is necessary to reduce volatility. But, of course, the volatility isn’t reduced, it is simply masked – hidden from the view of participants. The smoothed asset and liability calculations not only allowed companies to report a distorted funded ratio, it also enabled them to avoid the deficit reduction contribution (DRC) requirements, the variable rate premium, and the notice to participants. I would emphasize that these issues are hardly unique to United Airlines.”
Put it another way: the permitted smoothing techniques and funding deferments keep everyone believing that there’s some gentle “regression to the mean” going on – until there are some volatile results that those devices just can’t flatten. That’s the situation we’re in now: years of hiding reality and hoping it gets better just didn’t work.
Belt’s agency served up other grim news yesterday: there’s a total underfunding of $353.7 billion in the plans of firms required to file reports with the private investment trust. That’s an increase of 27% from last year. (Firms with $50 million in underfunding are required to file.) The following table is excerpted from their press release. Read it and be amazed at the speed with which plans can morph from overfunded to underfunded: there was a 5-fold increase in the number of underfunded plans filing with the PBGC in just 4 years. And the dollar amount of underfunding ballooned 17 times in the same span.