Chrysler: The Next Pension Crisis?

The prospect of having to pick up Detroit's pension obligations adds new pressure to an already burdened U.S. insurance plan

By Nanette Byrnes and Theo Francis

When the details of Chrysler's restructuring plan were announced on Apr. 30, few could have breathed a deeper sigh of relief than the managers of the Pension Benefit Guaranty Corp. The PBGC is the insurer of defined-benefit pension plans—that is, traditional pensions—and it could well have ended up tending to the 255,000 people covered by the automaker's pensions. But instead, the Chrysler plan, in which the United Auto Workers has taken a big hand, will remain in place, presumably to be transferred from the bankrupt company to the one that emerges, solvent, down the line.

But for the PBGC, and for Chrysler employees, it's quite possible that all that's been done is to delay the inevitable. Chrysler's pension plans are $9.3 billion underfunded. The company likely won't have to make a contribution for about two years, because of the intricacies of pension funding rules, says Charles E.F. Millard, director of the PBGC until this past January. But once that respite is over, the company will have to hurry up to fill the gap, contributing as much as $1 billion a year.

"For the moment, the pensions are saved, the unions are saved, the PBGC is saved, and management gets to worry about something else," Millard says. "That leaves the pensions as the elephant in the room for the future.…Realistically they're going to have some significant pension obligations that nobody's talking about now."

PBGC Faces Its Own Challenges

Millard's temporary replacement, Acting Director Vince Snowbarger, acknowledges that this may be a temporary respite. Snowbarger agreed as part of the deal to allow Daimler (DAI), which earlier had promised to contribute $1 billion to the Chrysler pension plans if the company shed them, to instead put in $600 million now, hoping the company returns to health and can maintain the plans itself.

"It was not in the interest of Chrysler workers, Chrysler, or the PBGC to terminate these plans precipitously," says Snowbarger. "One of our statutory missions is to help preserve these pension plans. It could be that in 10 years down the line it looks like we made a big mistake keeping them out there because the hole is just bigger, but presuming they can get on their feet, this is worth doing."

Snowbarger and the PBGC are facing their own challenges. While many companies have stopped offering defined-benefit plans (in which the company takes the responsibility for providing a predetermined retirement payout), the PBGC still insures defined-benefit plans that cover 44 million workers at 29,000 different companies.

If a company fails while its pension plan is underfunded, the PBGC is obliged to pick up the plan and pay retired workers. But it may not pay the full pensions that workers thought they were going to get; in some cases, such as the steel companies and airlines that filed for bankruptcy in the 1990s and early 2000s, many workers who had retired early with their full promised pension saw their monthly checks cut by more than 25%. A 2008 PBGC study of 125 plans terminated between 1990 and 2005 found 16% of the 525,000 participants suffered an average benefit reduction of 28%. Of the 70,000 retirees of Bethlehem Steel, whose plan the PBGC took over on Apr. 30, 2003, about 11,000 lost benefits, typically $500 of their $2,050 average monthly check.

Big Failures, Big Headaches

For the PBGC, the size of Detroit's plans is daunting. The insurer estimates the pensions of the U.S. automakers and their suppliers are underfunded by a combined $60 billion. General

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