Pension Benefits: Next Sector to Implode?

With pensions underfunded by as much as $300 billion and the main insurer of retirement plans—the quasi-federal Pension Benefit Guaranty Corp. (PBGC)—under enormous pressure, the pension sector might be the next to implode.

This week, the U.S. General Accounting Office (GAO) added PBGC’s single employer insurance program to its High-Risk List an action that resulted from the recent failures of numerous large plans.

The defined-benefit pension programs, which pay a fixed sum with employers making investment decisions, are at the heart of the issue with shortfalls brought on by a sluggish stock market and falling interest rates.

The potential for breakdown is so great, Treasury Secretary John Snow said earlier this month that it could end up being another savings and loan-type crisis. Pension funds last reached the boiling point in the early 1990s and while there was no government bailout, there was reform.

"Defined-benefit plans are under more pressure than at any time in a decade," Steven A. Kandarian, PBGC's executive director, told Dow Jones. "Every aspect of the defined-benefit system is under scrutiny - the funding rules, the accounting rules, the proper way to discount liabilities, and financial health of the PGBC, the list goes on."

He told Dow Jones that the industry is in the midst of a major change. "Right now, I'd say it's an intense period of debate," he said.

Congress has joined the debate by looking at how to value future benefit entitlements. Big business has backed a bill that would allow them to stop using the 30-year Treasury bond as the benchmark for measuring obligation, replacing it with a higher-grade corporate bond. The change would save companies billions right now.

The Financial Accounting Standards Board (FASB) is also looking at requiring better pension fund disclosure—requiring some funds to report quarterly rather than annually as they do now.

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