The New York Times - June 11, 2005
 

Pension-Shortfall Study Finds Winners and Losers

By MARY WILLIAMS WALSH
 

If the Bush administration's proposal to shore up the pension system were already in place, some large companies would have to double or triple the amounts they are putting into their pension funds this year but other companies would not have to contribute anything, a new analysis of corporate pension data found.

The study is coming out as the debate about pension fund changes in general and the administration's approach in particular is heating up. Business groups have been warning that the administration's plan would put undue pressure on companies that offer pensions, forcing some to divert needed cash from their business operations and prompting others to stop offering pensions. Members of Congress began to discuss a possible pension overhaul this week.

 Policy makers say the pension system needs to be repaired to prevent more big pension failures like the $10 billion one at United Airlines and an eventual taxpayer bailout of the Pension Benefit  Guaranty Corporation. But some companies and labor unions are concerned about remedies that would themselves be harmful.

The study, by David Zion of Credit Suisse First Boston who has made a specialty of analyzing the pension data that companies disclose in their annual financial statements, found that some companies would, indeed, be hard-pressed if the administration's proposal were already law. But he also found that many others would not feel a thing. Companies that would have to more than double their expected pension contributions this year include  General Motors,  Delta Air Lines,  Xerox, Cigna and  I.B.M., according to Mr. Zion's analysis.

Representatives of some of the companies, including G.M. and Xerox, questioned the study's validity, saying that their pension funds were fully funded according to the current rules. A Delta spokeswoman said the study reinforced Delta's position that the airline would soon be in serious financial trouble if it did not get some relief from its pension obligations.

But another sizable group of companies would owe nothing to their pension plans for 2005, even though they have told investors that they intend to put hundreds of millions of dollars into their plans this year. Those companies will get a tax deduction for the contributions.

They include  Verizon Communications, which has said it will contribute $870 million this year;  United Parcel Service, which said it would contribute $730 million;  Merck, which said it would contribute $415 million; and  General Electric, which said it would contribute $340 million.

Pension numbers have come under scrutiny as policy makers cope with the record-size failure of United Airlines' pension plans and the possibility that it could set off a chain reaction in the airline industry, eventually swamping the pension guarantor.

 Government officials reviewing United's plans have noted that the airline performed calculations - all in compliance with the law - that made its pension plans look robust when their true economic condition was worsening rapidly. On the basis of its measurements, United did not make any cash contributions to the plans for several years. That, too, was legal, despite a requirement that companies set aside enough money to pay all the pensions they promise.

Since the federal pension rules permit all companies to do the same type of calculations United did, there are fears that many companies may have weak pension plans. The true condition of the plans would not be apparent because the companies are generating enough cash to pay all their immediate obligations. Only if they declared bankruptcy, as United has, would the hidden insolvencies become apparent.

Mr. Zion set out to learn how much cash companies would have to put into their pension plans right away if the Bush administration's proposal were law.

The pension numbers in corporate financial statements, calculated according to rules issued by the Financial Accounting Standards Board, are often criticized as opaque and misleading. But Mr. Zion found that even in that thicket of numbers, he could find a few that would serve as meaningful proxies for the ones the administration wants companies to base their pension contributions on. The useful numbers were in the footnotes, he said.

Currently, companies base their pension contributions on an entirely different set of numbers, calculated according to rules in the Internal Revenue Code and kept on file at the Labor Department. These are the rules that Congress and the Bush administration plan to amend. The calculations for the financial statements would be unchanged.

 Mr. Zion said the numbers he selected from the footnotes were useful because they were not "smoothed" - that is, they were not revised by the companies' actuarial consultants to eliminate volatility. Smoothing is a widely established practice that companies prize because it keeps activity in the pension fund from showing up suddenly in financial statements. At the moment, smoothing is coming under fire, however, because it can distort a pension fund's appearance and sometimes make corporate profits look greater or less than they really are.

Once he found unsmoothed numbers, Mr. Zion was able to determine whether each pension fund had enough on hand to make good on the value of the benefits the workers and retirees had earned so far. He was also able to apply the rules the Bush administration has proposed for calculating contributions on that basis. He assumed that companies would be required to use cash.

Mr. Zion said it was impossible to calculate the effect of one important feature of the administration proposal: the extra pension contributions companies would have to pay if the three major ratings agencies had cut their creditworthiness to less than investment grade. Currently, all companies base their pension contributions on the same calculations. So, if Congress enacted the full administration proposal, companies like  Georgia-Pacific,  Maytag, and the  Goodyear Tire and Rubber Company, would have to pay even larger contributions than Mr. Zion's study showed.

G.M., whose credit was recently cut to less than investment grade by two of the three main bond rating agencies, would be narrowly spared.

Because of the way companies report their data, Mr. Zion also had to apply the administration's proposal to companies' pension obligations to their foreign workers who are not covered by the pension law.


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