Pension Agency Braces for Car Trouble

WASHINGTON -- The steel and airline industries have dumped underfunded pension plans on the federal government's Pension Benefit Guaranty Corp. Is the auto industry next?

"Beyond the airline industry, the insurance program faces tremendous exposure from the auto sector," says Bradley Belt, executive director of the PBGC. The agency says the pension assets of auto makers and parts companies fall short of the pension promises they have made to workers by $45 billion to $50 billion -- more than the $31 billion shortfall in the airline industry's pension plans.

A Credit Suisse First Boston analysis of pension plans in 54 industries, based on 2003 public filings, ranks the auto industry's plans the weakest of all. A half-dozen auto-supply companies recently have sought Chapter 11 bankruptcy-law protection, which is likely to result in $837 million in unfunded pension obligations being transferred to the agency. A total of 26 companies in the auto industry have pension plans with assets that fall at least $50 million short of obligations.

ARE AUTOS NEXT?   Chart: Auto suppliers that expect to hand pension plans to the government and the pension-fund status of major auto-industry companies.

The company that worries the pension agency the most is Delphi Corp., the Troy, Mich., parts operation of General Motors Corp. that was spun off in 1999. Delphi's plans have pension promises valued at $11.4 billion but assets of only $7.4 billion, according to the most recent company information. Delphi relies on GM for about half of its $28 billion in annual revenue and is saddled with high labor and raw-materials costs at the same time that GM's production is falling.

The pension agency calculates pension liabilities based on what it would cost to pay retirement benefits if the plans were terminated; companies give snapshots of the current health of their plans, often a rosier view. The agency says that if Delphi were to turn over its pension plan to the agency today, the underfunding would total $5.1 billion rather than the roughly $4 billion indicated by Delphi.

UBS auto analyst Robert Hinchliffe suggested in a recent report that Delphi should consider a Chapter 11 filing, in part to shed its pension obligations and to pressure the United Auto Workers to help it cut costs. "Bankruptcy has become a management tool these days," Mr. Hinchliffe said.

Auto-industry analysts don't believe that the supplier, which generated positive cash flow in the fourth quarter, is likely to slide into bankruptcy soon. Delphi, which last month disclosed accounting irregularities, says it has a $1 billion cash reserve and access to substantial bank credit, including a $3 billion revolving facility that it renegotiated yesterday. A spokesman declined to comment on a possible Chapter 11 filing or about plans for dealing with its pension-plan shortfall.

The agency's Mr. Belt said the idea of a Delphi bankruptcy "sent shudders" through the PBGC, in part because the agency fears it would trigger bankruptcy filings by others in an industry battered by soaring prices of steel and petroleum, which drives the cost of plastics, and by shrinking sales to U.S. manufacturers. In airlines and steel, a few bankruptcies have triggered filings by rivals seeking to cut costs to be competitive. That is less likely in the auto-parts business. Except for Delphi and the other big supplier, Visteon Corp., most parts makers aren't unionized, so a bankruptcy filing wouldn't pressure rivals to do the same to lower labor costs.

The Pension Benefit Guaranty Corp. was created by Congress in 1974 to insure defined-benefit pension plans -- those that provide workers with a monthly check based on wages and years on the job -- after a campaign that began when 4,000 Studebaker-Packard Corp. workers were left without pensions when the auto maker shut in 1963.

When a company goes under -- or when it turns its pension plan over to the PBGC -- the agency guarantees annual pensions of as much as $45,614 at age 65, even if pension plans promised more. The agency pays the pensions from the investment portfolios of the pension plans it takes over and from $1 billion a year in premiums paid by companies with defined-benefit plans.

Last year, the agency said it had $62.3 billion in long-term obligations to pay workers, but only $39 billion in assets, a gap of $23.3 billion.

So far, the agency has taken over the pension plans of 141 steel companies, which were underfunded by $10.2 billion, and 12 airlines, which were underfunded by $5.2 billion. The agency said it expects to assume a further $6.4 billion from UAL Corp.'s United Airlines.

Three large parts makers have filed for bankruptcy protection in the past six months: Intermet Corp. of Troy, Mich.; Citation Corp. of Birmingham, Ala.; and Tower Automotive Inc. of Detroit. All three are trying to offload their pension plans onto the agency.

Intermet's pension fund is short $71 million, and Citation's $12.1 million, the PBGC says. Tower's underfunding hasn't been determined. In addition, Amcast Industrial Corp. of Dayton, Ohio, is asking a bankruptcy court to terminate a pension plan that is $83 million short of assets needed to fulfill promises.

Companies can ask the PBGC to take over pension plans if the company satisfies the agency that it can't survive otherwise. For instance, Phillips Service Industries Inc., a Livonia, Mich., manufacturer, hasn't filed for bankruptcy protection, but has asked the agency to take over the plan of a defunct subsidiary, Ferranti International, the PBGC said.

At least a dozen auto suppliers' credit ratings have been downgraded to junk levels, sometimes a precursor to a bankruptcy filing. Among them are ArvinMeritor Inc., of Troy, Mich., which has a pension plan underfunded by $269 million, and Goodyear Tire & Rubber Co., of Akron, Ohio, which has a plan underfunded by $3.1 billion.

Bush administration proposals to bolster the pension agency's finances could intensify the pressure on companies with low credit ratings. The administration plan calls for flat-rate premiums for companies to jump to $30 annually for each employee covered by a pension plan from $19, and higher for companies with low credit ratings. It also seeks to limit the ability of financially weak companies to make new pension promises to workers.

Alan Reuther, the UAW's head of legislative affairs in Washington, and employer trade associations say the premium increases would cause financially shaky companies to file for bankruptcy protection to offload pension plans. The union advocates using federal tax dollars to cover the shortfall in steel- and airline-industry pension liabilities.

Write to Michael Schroeder at mike.schroeder@wsj.com