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Sour market, paltry rates threaten workers' retirement funds

Monday, June 03, 2002

By Len Boselovic, Post-Gazette Staff Writer

If looking at your 401(k) and IRA statements makes you queasy about your retirement, take a peak at what your company's pension fund has been up to lately.


Pension graphic


For some large, publicly traded companies in the region, 2001 was the second consecutive year their defined benefit pension funds lost money. Defined benefit plans pay retirement benefits based on a worker's wages and tenure, with the employer responsible for contributing to the plan and managing how the money is invested. They are different from a 401(k) and other defined contribution plans, in which a company contributes a percentage of the worker's pay and the worker manages the money.

Out of 16 companies examined by The Post-Gazette, only Alcoa's defined benefit plan reported a gain last year, up 0.7 percent. U.S. Steel's plan nearly broke even. Pension fund losses for the other 14 companies ranged from 2.3 percent for Kennametal to 27.1 percent for Matthews International.

Just like high-flying tech stocks and mutual funds, the pension funds' average annual returns the last five years have come down to earth. Only two of the companies, Alcoa and Dominion Resources, averaged double-digit annual returns over that period.

Even when the stock market was going strong, some companies failed to earn as much on their pension funds as they were paying out in benefits. The market's recent misery, compounded by meager or nonexistent corporate profits, raises questions about whether some companies will have the cash to pay the benefits workers and retirees have earned.

The Pension Benefit Guaranty Corp., the government agency that insures pension plans covering 44 million workers and retirees, said 32 percent of the pension plans it guarantees were underfunded as of Sept. 30, up from 28 percent the previous year.

Comparing the projected pension obligations with the pension money the 16 local employers have on hand, six of the companies are underfunded, the most serious being US Airways, which is 57 percent funded based on projected benefits of $5.49 billion and pension fund assets of $3.95 billion.

"Any time you're below 90 percent, that's a cause for concern," says David Hammerstein of Yanni Partners, a Downtown pension consulting firm. "In order for it not to be scary, a company would have to be enormously profitable."

Companies with underfunded pension plans have basically two options: increasing returns on the fund's investments or contributing cash generated by operations. Neither alternative is reliable these days. The stock and bond markets are going nowhere fast and it's hard to come up with cash from operations when you're losing $1.97 billion, which is what US Airways lost last year.

"You can't really look to the capital markets to totally bail you out," Hammerstein says.

He thinks comparing the current value of assets to the projected benefits is the best measure of a pension plan's health. But others say the comparison can be misleading. While it assumes employees will earn more benefits in the future, it doesn't take into account future contributions to the plan or the plan's future earnings. The IRS, which administers pension funding rules, uses those factors to determine whether a plan is underfunded.

Take Equitable Resources, which at year-end had only 73 percent of the cash it needed to cover its projected pension liabilities. But if you include assumptions about future earnings, Equitable says it has about $1.11 for every $1 in retirement benefits it's obligated to pay.

However you measure a pension fund's health, low interest rates and the stock market's poor performance cloud the picture.

Interest rates are one measure of how much a company can expect to earn on its fund. The lower the interest rates, the lower the expected return and the more cash a company must have in its plan. The languishing stock market further increases pressure on companies to fund the plans with cash from operations. Or they can reduce benefits workers will earn in the future by negotiating new contracts with labor unions.

Really troubled companies can terminate the plan in bankruptcy and turn it over to the PBGC.

US Airways is seeking $1 billion in concessions from its workers and says it may seek bankruptcy if it doesn't get them. If the carrier's plan is taken over by the PBGC, some of its higher-paid workers and retirees face the prospect of living on smaller retirement checks. That's because the PBGC limits the monthly benefits it will guarantee. For pension plans terminated this year, PBGC will pay a maximum of $42,954.60 annually for someone who retires at 65. US Airways' flight attendants may not make that much, but its pilots do.

Even companies with healthy pension plans are feeling the pinch.

Allegheny Technologies, a specialty metals producer, used $75.1 million of its pension surplus over the last two years to pay for retiree medical benefits. A federal law allows companies to do that as long as their pension fund is more than 125 percent funded. That is, it must have more than $1.25 in assets for every $1 in pension liabilities. Allegheny Technologies won't be able to take advantage of the law this year because its pension fund has fallen below the 125 percent level. So the cost of the benefits, which has averaged $37.5 million over the last two years, will have to come out of the company's pocket.

So, how concerned should workers be about the health of their pension plan?

"Plans are not as well funded as they were last year, or the year before, or the year before that," says Ken Steiner, an actuary for benefit consultant Watson Wyatt.

Beyond that, it's hard to say because the IRS, PBGC and accounting regulators each have different sets of rules and assumptions for determining whether a plan is underfunded. Moreover, assumptions companies make about how long workers will stay on the job, future pay increases, how long retirees will live and how well the company will invest its pension money significantly affect how healthy a plan looks.

The bottom line depends on whether you work for a strong company or one with a checkered record when it comes to turning a profit. Companies that are consistently profitable have better funded pension plans than those that are not. They also are more likely to have the cash needed to shore up the plan when the stock market and interest rates turn south.

That's why so many steelworkers and retired steelworkers have such a hard time sleeping at night.

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