Pension turbulence ahead

The troubled airlines bother me on a lot of levels.

They're doing everything they can to cause the public to pay for their pain. They are part of an industry that's overwrought, flailing about, seeking bankruptcy court assistance again and again and, this week, asking the government to open up the petroleum reserves to fix their energy cost problems.

What many people are assuming will come next is that the airlines will bring the Pension Benefit Guarantee Corp. to its knees. It could happen, but I doubt it. In the process, however, the airlines will do a lot of damage to everyone else's prospect for a pension.

And they're distracting investors' attention from a widespread problem: The airline industry has $31 billion in pension promises to employees that were unfunded by the end of last year.

United Airlines, now in bankruptcy, may be close to the largest default ever on a U.S. pension. The company has said it plans to skip a pension contribution of $500 million this fall.

It also has indicated that it wants to terminate four pension plans that are underfunded by more than $8 billion. Should it succeed in doing so, the Pension Benefit Guarantee Corp., which insures pensions, would pick up the plan and likely take on more than $6 billion in new obligations.

Then there's U.S. Airways. It has given over its pilots' plan to the PBGC and is seeking IRS permission to delay paying $67.5 million that it owes this year to its other plans.

Next, we can fret over Delta's $5.65 billion, Northwest's $3.74 billion, the AMR Corp.'s $2.66 billion and Continental's $1 billion in underfunded pension liabilities.

THE BIG PICTURE

And that's just the airlines. Camelback Research Alliance, an analytical group in Scottsdale, Ariz., found the problem to be much larger.

In the 100 largest unfunded pension obligations Camelback found in research that I requested, only four major airlines -- AMR, British Airways, Delta and Northwest -- are in the top 25.

A handful of names on that list, such as Tyco and Motorola, you might suspect of being in pension trouble; others, including such stalwarts as Cigna, DuPont, Pepsico and Shell, you might not.

The unfunded liabilities at the end of 2003 ranged from $22.6 billion, at Nippon Telegraph and Telephone. to $671 million, the unfunded figure facing both Cummins Inc. and Rockwell Automation.

Investors in these shares may not be buying into the notion that they're holding on to pension bombshells.

''No one really paid attention this year,'' said Zachary Shannon, an earnings quality analyst at Camelback.

They should. The dwindling number of companies that still offer pensions can rely on their pensions to help out their earnings.

In the real world, traditional stock- and bond-market investments aren't producing great returns this year. In the world of pension accounting among the Standard & Poor's 500, 8 to 8.5 percent expected returns on pension investment are the norm, Shannon said.

For example, Eli Lilly & Co., whose pension was underfunded last year to the tune of $948.5 million, according to Camelback, used a 9.27 percent expected rate of return.

An unrealistically high expected return can bolster a company's bottom line. If their pension investments are going to earn a high number, companies won't need to draw down as much cash to make up for any shortfall. What's more, there's generally no penalty for overestimating the return.

The direct earnings boost can be big. Lucent Technologies, Camelback figures, counted more than $713 million in tax-adjusted pension income last year. If it hadn't, its $770 million loss would have been much greater. Potlach Corp.'s $51 million in net income would have been 16 percent smaller without the $8.6 million in taxadjusted pension income.

Any executive in any industry, seeing a competitor with such a pension burden, would seek to avoid the burden to get a competitive edge.

So the trend -- from a peak of 112,000 private-sector pension plans in the 1980s to 31,000 today -- is likely to continue.

If you have a pension, you have reason to worry about whether it will continue. Employers don't have to terminate their plans to hurt workers; they can freeze benefits, too.

BAILING OUT

This is the fire that won't really burn, at least in not Washington. Despite talk of a taxpayer bailout for the PBGC, the problem isn't immediate enough to warrant that.

Even if United were to get permission to unload its pension tomorrow, the PBGC would get all the assets that are in its pension today, almost $7 billion. And it wouldn't have to pay out those billions until it becomes due to the retirees.

''The crisis is always over the horizon. They can kick the can down the road and leave future generations to pay the bill,'' said Steven A. Kandarian, a former PBGC boss who spent years trying to get Congress to change the rules.

But it may be over the horizon forever. Shannon says that, with this year's not-so-great stock-market returns, we may soon see a number of weak pension plans growing even weaker. And the crisis will loom for investors as well as for those counting on pensions for their retirement.