Agency: Auto pensions underfunded by $77 billion

May 20, 2009

Agency: Auto pensions underfunded by $77 billion


The Pension Benefit Guaranty Corp., the federal agency that protects basic pension benefits of private-sector pension plans, said today that pensions in the auto industry are underfunded by about $77 billion.

According to PBGC estimates, about 45% of those underfunded pension benefits would not be guaranteed in the event that all those plans in the auto industry would have to be terminated.
The estimate is wide-ranging because it covers auto manufacturers and suppliers that offer pension plans and remain vulnerable in the economic downturn.

The PBGC said today that it estimates that about $42 billion of the underfunded benefits in the auto industry would be guaranteed in the event of plan termination.

Vince Snowbarger, acting director of the PBGC, noted in an interview earlier this month that Chrysler LLC and General Motors Corp. are not currently expected to terminate their pension plans.

The GM pension plans are estimated to be underfunded by about $20 billion. The PBGC said about $4 billion would be guaranteed; about $16 billion would end up as lost benefits.

Jeffrey Speicher, a spokesman for the federal agency, said this month that the PBGC would cover just about $2 billion — or about 22% — of the underfunded amount of the Chrysler plans. Chrysler’s pension plans are estimated to be underfunded by a little more than $9 billion based on the agency’s estimates.

The PBGC is closely monitoring companies in the auto manufacturing and auto supply industries.

The pension insurer may have to deal with pensions from troubled companies in many sectors of the economy, including retail, financial services and health care.

The PBGC posted a $33.5 billion deficit for the first half of fiscal year 2009. Snowbarger is scheduled to speak today to the Senate Special Committee on Aging.

Based on unaudited financial numbers as of March 31, the deficit represents an increase over fiscal year 2008’s $11 billion shortfall, and is the largest in the agency’s 35-year history.

“The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses,” Snowbarger said in his written testimony.

“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed,” he said.

The PBGC explained that the $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

Snowbarger notes that as of April 30, the PBGC’s investment portfolio consisted of 30% equities, 68% bonds, and less than 2% alternative investments, such as private equity and real estate. All the agency’s alternative investments have been inherited from failed pension plans.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment return.

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