Why Pensions Are Probably Safe

The federal pension-guarantee fund has lost money, but it appears healthy enough to backstop any market losses by traditional corporate plans

By Nanette Byrnes

If you're retired, you're probably getting pretty worried by now. The stock market's gyrations (BusinessWeek.com, 10/23/08) are painful for all, but some of the most dramatic numbers are the losses being reported by pension funds.

According to benefit consulting firm Mercer, traditional pension plans sponsored by large U.S. companies have seen their funding fall by almost $100 billion this year. And if corporate bond yields, which are used by most companies to measure the value of their plan liabilities, were to return to more typical levels, that number could increase to more than $400 billion.

Those concerns will bring Charles Millard, director of the Pension Benefit Guaranty Corp. (PBGC), the government-sponsored insurer of pension plans, to Capitol Hill on Friday, Oct. 24. His testimony before the House of Representatives' Committee on Education & Labor will center in part around the $3 billion in stock market losses the PBGC itself has sustained since last October.

Underwater Pension Plans

A recent analysis by UBS Investment Research (UBS) estimates that 236 companies in the Standard & Poor's 500-stock index have pension plans that are underwater—their assets are less than their obligations—though many just barely so. On its critical list were 20 companies with pension plan assets equal to or greater than the market cap of the parent company, among them General Motors (GM) and Ford (F). The PBGC currently manages 3,800 plans.

Those are all big numbers. But it's unclear whether Congress will do much about them. The committee's main focus seems to be the PBGC's investment strategy, which the chair of the Education & Labor Committee, U.S. Representative George Miller (D-Calif.), has described as a controversial shift from fixed-income securities such as U.S. Treasuries to more risky securities like real estate.

Still, experts say retirees with traditional defined-benefit pensions have little to worry about. If you're reliant on a 401(k), there is reason to be concerned. Here are some answers to the questions all this raises for those near or in retirement:

If a company's pension plan sustains big losses, will that affect the checks being received by current retirees?

It should not, says Mark Johnson, former director of American Airlines' (AMR) pension plan, which had assets of $14 billion in 2001 when he took early retirement. He is now a consultant with Erisa Benefits Consulting of Grapevine, Tex. Companies may have to contribute more to the plans to meet their obligations, but participants' benefits won't be cut.

However, there's a good chance that more companies will be freezing these plans in the near future, Johnson argues, because of the drop in asset value. New accounting rules for pensions could well mean many companies have to put additional cash into their plans to shore them up quickly. That would accelerate a long-term trend away from these plans, where companies make the contributions, and toward 401(k)-type plans, where employees make pretax contributions and their employers may kick in some matching amount.