RAY SUAREZ: As the nation's planes take to the air this summer, some of the employees keeping them aloft face uncertain futures. Many of their companies' pension plans are in jeopardy. One of those companies, United Airlines, terminated its pension plans after a bankruptcy judge gave it the green light last month. Underfunded by $9.8 billion, the United default is the largest in U.S. history.
Now, the carrier's retirees get their benefit checks from the Pension Benefit Guaranty Corporation, or PBGC, a federal body now running in the red by some $23 billion. Today, the Senate Finance Committee brought federal pension insurers, airline industry executives and employee representatives to Washington for a hearing designed to help prevent the next pension collapse. The chairman, Sen. Charles Grassley from Iowa, was critical of loopholes in the law that allowed United to portray its pension fund as solid when it was in fact weakening.
SEN. CHARLES GRASSLEY: In addition to allowing plans to book phantom investment gains United was able to use stale, non-market interest rates to value pension liabilities, thereby further disguising funding deficits. In other words, our pension laws tell these companies, "take off the green eyeshades and put on rose-colored glasses."
RAY SUAREZ: The executive director of the PBGC, Bradley Belt, said United had operated within the law.
BRADLEY BELT: The fact of the matter is that under current law, companies have the legal right to pursue distress termination, to seek to shed their pension liabilities onto the government. That's the law the structured framework that Congress has put in place. United was taking advantage of that situation as, in my view, far too many companies have done in recent years.
RAY SUAREZ: Though the hearing focused mainly on the airline industry, more than half of the nation's 100 largest pension plans have less than the promised benefits on deposit. Some 34 million people, or 20 percent of the nation's work force, expect to get payments from their employers' benefit plans. Capt. Duane Woerth, the head of the Air Line Pilots Association, warned other airlines would follow United's path.
CAPT. DUANE WOERTH: All these legacy carriers are on the same path. U.S. Airways and United got there first, but I can tell you with absolute certainty Delta Airlines, Continental Airlines, Northwest Airlines and eventually American Airlines are on that same path.
RAY SUAREZ: Delta's CEO, Gerald Grinstein, said other airlines were headed toward bankruptcy unless reforms were made.
GERALD GRINSTEIN: Airlines are at a crossroads. Without changes to the current rule, airlines will almost certainly be forced into bankruptcy in the transfer of additional pension liabilities to the PBGC.
RAY SUAREZ: But Republican Sen. Jim Bunning of Kentucky took airline executives to task.
SEN. JIM BUNNING: Sir, in the last two and a half years, how many dollars has Delta Airlines lost?
GERALD GRINSTEIN: Well, we lost $5 billion last year.
SEN. JIM BUNNING: Five billion. You're going to listen how bad management at Delta Airlines has cost the employees of Delta not only their pensions, but reduced pensions, reduced pay and reduced everything, and you blame it on everybody but your own management group.
RAY SUAREZ: The president of the Flight Attendants Association, Patricia Friend, gave the problem a human face.
PATRICIA FRIEND: These are not careless people who failed to plan for their retirement. They did everything right -- they worked hard, they saved as much as they could and they invested when possible. Their only mistake was one of trust.
RAY SUAREZ: Congress is now beginning to draft legislation to strengthen the future finances of the Pension Benefit Guaranty Corporation. No timetable has been set for the debate or the vote.
A closer look now at the pension system and the challenges it faces. For that, we are joined by Bradley Belt, executive director of the Pension Benefit Guaranty Corporation, the federal institution that backs-up private pensions -- as we just saw, he spoke at today's hearing; and Karen Friedman, director of policy for the Pension Rights Center, an organization that seeks to protect the pensions of workers and retirees.
And, Karen Friedman, given what was said at today's hearing, given the very high profile failures of the recent past, should a portion of those 34 million workers who are in defined benefit plans now be skeptical, be worried that they're going to get the check they think they have coming to them?
KAREN FRIEDMAN: Well, I want to talk about this in a couple different ways, Ray. First, just because a company has an underfunded pension plan is not immediate cause for concern. How a pension plan is funded is cyclical, and it's done over the long term just like the economy. So a pension plan that may be underfunded today may not be underfunded tomorrow. In fact, in the 1990s, a lot of the companies that have underfunded plans now had over funded plans in the 1990s, just as an example.
The issue is, if a company is troubled and has an underfunded plan, then there may be cause for concern. And that company may terminate the plan. But even then, I want to point out -- and this is where, you know, Brad is here -- the Pension Benefit Guaranty Corporation is there as a backup system to ensure that people in defined benefit plans will be able to get their benefits paid by the PBGC, if a company can't meet all of the benefit obligations. And in a majority of cases, the PBGC does pay most of the benefits. The United case, however, has devastating consequences, because, in that situation, the company was able to go into a bankruptcy court and dump its liabilities on to the PBGC, which led to $4 billion in losses for workers. And that's a tragedy.
RAY SUAREZ: How did all these companies, Bradley Belt, get into trouble at the same time?
BRADLEY BELT: It was a combination of factors, Ray, perhaps most attributable to the funded status of the pension plans themselves. What was happening in the pension plans and beginning in 2000 you saw the market, equity markets turn against them. Many of them were heavily invested equities taking on significant equity risk. The markets went south for a period of about three years.
At the same time, interest rates also fell, and that's how they discounter their liabilities. When interest rates fall the value of those liabilities goes up. So you're moving in opposite directions. The problems that under current law much of that movement, that funding gap that was building fairly substantially for that three-year period of time, was hidden from view because of some flaws in the current funding rules.
And that's why the Bush administration and the president is so committed to changing those rules, strengthening them so that we understand the true financial status of the pension plan at any point in time and we can move quickly to restore those plans to healthy funded status.
RAY SUAREZ: What about these changes in the rules? Will they be at least part of the answer that you're looking for?
KAREN FRIEDMAN: Well, certainly we think that the administration has presented some strong and thoughtful proposals. However, we think in a lot of situations the administration's proposals actually may have the opposite effect. That instead of strengthening defined benefit plan it may undermine the defined benefit plan, because some of what their proposing is so onerous that companies may exit the system. And in some cases, their solutions rely on benefit cuts for workers which we disagree with.
RAY SUAREZ: Now you just heard Bradley Belt talk about interest rates, about the decline in the markets. You yourself called the problem "cyclical." But the market's clawed back a lot of its post-2000 losses. Interest rates have risen, gradually, but eight straight quarters. Job creation has been robust. How come a lot of these pension plan balance sheets aren't in better shape as a result?
KAREN FRIEDMAN: Well, again I mean we saw a situation in the 1970s where there were underfunded pension plans. There may be other, you know, factors. Brad is absolutely right that some of the funding rules do need to be strengthened, Ray. I mean, there's no question on that. The funding rules allow for companies often to promise benefits way into the future and not fund them, so we agree that there has to be some funding reform. However, we think that there has to be a balance struck between the kinds of reforms that will strengthen funding for pension plans and not lead to companies just dropping those plans.
RAY SUAREZ: Well, if there are more United Airlines in the pipeline, is your agency ready to back up those pensions? Can you handle many more of them?
BRADLEY BELT: We have the ability to do so in the near term but clearly not over the long term without a change in law, Ray, and that's why it's so critically important to put in a place appropriate policy changes now. Karen is right. There does need to be a balancing of interest. But the balancing cannot tip on the side of continuing the status quo set of rules that got us into this problem in the first instance.
RAY SUAREZ: Well, tick off what some of those changes would be.
BRADLEY BELT: Strengthen the funding rules so that companies have meaningful measures of assets and liabilities, market-based measures, not some phantom measures of assets and liabilities based upon market conditions two, three, four and five years ago.
RAY SUAREZ: So right now I have this much money.
BRADLEY BELT: That's exactly what participants, retirees, workers, shareholders and even regulators need to know to make informed life and policy and business decisions. We need to make sure that we have an appropriate funding target so that companies are always moving in the right direction to make sure that if there is a funding gap that develops, they're quickly moving in the direction of closing that funding gap. We need to make sure that there is a premium structure in place that recognizes that different companies pose different levels of risk to the insurance program, just as the case with homeowners insurance, life insurance or auto insurance.
Most importantly we really do need much greater transparency into the system. There's far too little information. We need to shed a little sunlight on pension finances. It's been an area that's really been cloaked in darkness for far too long. Workers and retirees have a right to know the president believes very strongly that companies that make pension promises to their workers should honor those promises and critical to having that happen is allow them to be able to post some discipline on the companies themselves by understanding what the funded status of the pension plan is at any given point in time.
RAY SUAREZ: Karen Friedman.
KAREN FRIEDMAN: And what I would say to that we certainly agree that premiums should be increased and, in fact, if premiums had been doubled since the time that the Pension Benefit Guaranty Corporation was created, we probably wouldn't even have a deficit right now in the PBGC. So we agree with that.
And we certainly agree that there should be some changes in the funding rule but they have to be done slowly because their aim...most of the administration's proposals are aimed at the very troubled industries that have defined benefit plans. We don't want to push those companies out of the pension business.
The point here for the American public is that this is not just an academic exercise. We're talking about defined benefit plans are the most efficient way of providing benefits to workers of all different income levels. And what is worrisome is that the administration's proposals in some cases may push employers out of the system. And then who's going to win in that situation? We're going to move into a society which we're moving into anyway, where there's not going to be good defined benefit plans and we're moving into a do it yourself savings society where people are going to have to save on their own. We need to find benefit plans in this country so we can provide adequate income to people in the future. And one of the questions that I have, I want to go back to United for a minute --
RAY SUAREZ: Quickly.
KAREN FRIEDMAN: Okay. United was able to use the bankruptcy courts to dump their liabilities on to the PBGC, and we have to do something now -- and I think Brad would agree with me on this -- to ensure that companies can't use bankruptcy courts in that way.
RAY SUAREZ: Well, let's take on just that. Does this create an incentive for companies that may have other options to declare bankruptcy because they know they can take that pension load off their back?
BRADLEY BELT: Well, that's certainly a legitimate concern. We saw a domino effect in steel industry. We've seen the beginnings of that certainly in the airline industry. And understand that not only U.S. Airways and United Airlines, we've previously taken over and assumed responsibility for the pension plans in Braniff, TWA, Eastern and Pan Am.
And that's the important point to note. In the last three there have been 23 corporate pension defaults in excess of $100 million. United is simply the largest of those with a pension shortfall of almost $10 billion, and as Karen noted, tragically a loss of over $3 billion in benefits for retirees and workers. That's unacceptable. That's why we need to strengthen the pension rules.
It's not acceptable to allow the status quo framework to stay in place where we've run into this situation where workers and retirees are losing benefits that they earn that were promised to them by the corporate plan sponsor. And not only do they lose, it's the other responsible premium payers that have acted prudently to fund their pension plans that also have to face the prospect of higher premiums and ultimately the taxpayer may be at risk.
RAY SUAREZ: Bradley Belt, Karen Friedman, thank you both.
BRADLEY BELT: Thank you, Ray.
KAREN FRIEDMAN: Thanks.