Pension Protection Funds Under Stress?
The total deficit in the Pension Protection Fund has increased by more than £220bn since November 2010, the PPF estimates.
The total accumulated deficit of all schemes in the PPF index reached £222.1bn at the end of November 2011, up by £63.5bn from the end of October 2011, when it came to £158.6bn.
There was a marked year on year difference, compared to a deficit of merely £1bn at the end of November 2010.
The figure was a result of the difference between the fund’s total assets (£1007.1bn) and total liabilities (£1229.2bn).
Of the 6,533 schemes included in the index, 5,390 were in deficit and 1,143 were in surplus.
According to the PPF, equity markets and gilt yields were the main drivers of funding levels.
The increase in liabilities therefore reflected the impact of lower gilt yields, with 15-year gilt yields falling by 20 basis points.
Over the whole year to the end of November 2011, 15-year gilt yields were down by 116 basis points and the FTSE All-Share index fell by 0.9 per cent.
Assets rose by 0.7 per cent over the month because rising bond prices more than offset the impact of falling equity markets.
Pension deficits swing wildly but there is a structural problem and it isn't only the UK's Pension Protection Fund that is reeling. In the US, Hazel Bradford of Pensions & Investments reports, PBGC plan valuation problems go beyond United Airlines:
The PBGC’s inspector general said the agency lacks internal controls over the valuation of terminated pension plan assets, not just over the handling of United Airlines’ plan terminations that the IG’s report called “seriously deficient.”
Rebecca Anne Batts, inspector general of the Pension Benefit Guaranty Corp., said in a telephone interview that the agency’s attempts to correct valuation procedures “has not resulted in a fair market valuation of assets,” because of inadequate oversight and contracting guidelines.
“PBGC still hasn’t invested in the expertise to get this right,” Ms. Batts said.
“It’s not going to be an easy fix,” Ms. Batts said. “You have a cultural problem and it’s hard to know how you’re going to get back to better numbers. That’s the message of the report.”
The report on the valuation of United Airlines’ terminated pension plans in 2005 focused on serious flaws in plan asset audits by one contractor, Integrated Management Resources Group, but Ms. Batts said there’s a lack of internal controls over all terminated plan valuations, despite numerous reviews by both the agency and its inspector general.
Among other plan valuations, the $8 billion valuation made by IMRG for four United defined benefit plans “is not a reliable number,” Ms. Batts said. It has not been determined yet whether that $8 billion figure is too high or too low.
The inspector general first questioned discrepancies in the United audits in 2010, which prompted the PBGC to engage a CPA firm to re-evaluate those plan assets.
The second reports “were also themselves significantly flawed,” according to the new inspector general report.
IMRG CFO Melanie Bilal said the firm had no comment.
Ms. Batts said the PBGC board of directors — Labor Secretary Hilda Solis, Commerce Secretary John E. Bryson and Treasury Secretary Timothy Geithner — “is taking this seriously” and will discuss the issue at its meeting Thursday.
Responding to the latest United report in a Nov. 30 statement, Vincent Snowbarger, PBGC deputy director of operations, said agency officials are “embarrassed” by the poor work, but will fix any miscalculated benefits including paying overdue amounts with interest, and have begun implementing some of the inspector general’s recommendations in the United report.
“There’s no question that our contractor did a very bad job and we didn’t catch it. We have a plan in place to make sure that this doesn’t happen again,” said J. Jioni Palmer, PBGC communications director, in a telephone interview “The fact that it taints us in the minds of our retirees is the problem. We’re committed to looking at everything and making sure that people are made whole.”
In a Nov. 30 letter to the board, Rep. George Miller, D-Calif., ranking member of the House Education and Workforce Committee, asked for a timeline for revisiting United’s valuations within two weeks, and for PBGC to “identify all flaws” in all plan valuation and benefit calculation contracts performed by IMRG. Mr. Miller wants the PBGC to correct underpayments to plan participants “with interest and without delay.” Citing “grave concern” over the agency’s accounting failures, Mr. Miller also referred the IMRG contracts to the U.S. attorney general.
The United audit can be found online at http://oig.pbgc.gov/audit/2011/summaries/PA-10-72-1.html.
You might be asking yourself who backstops these pension protection funds and the answer is taxpayers. These funds are an economic black hole that we rarely hear about but if they implode, taxpayers will be called upon to shore them up.
Of course, workers and retirees at American Airlines and other troubled companies will face sharp benefit cuts. Unlike politicians and public sector workers, they don't have gold-plated defined-benefit plans, and when the company they work for goes under, they pay the ultimate price. This is why Gregg Shotwell of the Monthly Review is rightfully angry when he claims, Labor Has a Legitimate Lien on Capital:
When Steve Miller, the vulture capitalist who drove Delphi into the ditch of America's dreams, declared, "Bankruptcy is a growth industry," he was smiling, but he wasn't joking.
Bankruptcy in the US isn't a sign of economic distress or mismanagement. It's a business plan -- calculated, cunning, and void of redeeming social value. American Airlines is the latest in a long line of financial obscenities that make vulture capitalists salivate.
If we had a president we could believe in, he would not only call out the National Guard to protect the constitutional rights of citizens at Occupy protests, he would defend the vested benefits earned by workers with the full moral and institutional authority of his office. It won't happen.
We must cease and desist from unrealistic expectations and mount our own counteroffensive. US courts routinely aid and abet the extortion of workers and the plunder of pension plans. Capitalism isn't above the law in the United States, it is the law. Peace and solidarity activists are hounded, harassed, and arrested but the forcible transfer of wealth from the working class to the investing class is protected concerted activity.
American Airlines' debt doesn't outweigh its cash and assets. In fact, American Airlines is financing its own bankruptcy. That's not distress, it's brass-knuckle union-busting. The business press makes no bones about American Airlines' plan to profit off the broken backs of labor contracts. In fact, they crow about it.
American Airlines ordered 460 new planes from Boeing and Airbus less than five months ago at a cost of $38 billion. Those contracts will be honored even as American Airlines plans to dump pensions underfunded by about $10 billion for approximately 130,000 workers and retirees.
American Airlines doesn't pretend to offer a business plan that promises better management. The only benefits American Airlines purports to extract from bankruptcy are pension evasion and concessions from unions facing a court-ordered firing squad.
The crib notes for this business plan read: bankruptcy = profit. The longhand reveals the moral compunction of a crocodile.
The Pension Benefit Guaranty Corporation (PBGC) estimates that a default at American Airlines could be the largest in US history. The PBGC itself is teetering on the edge of insolvency. In 2004, a report by the Center on Federal Financial Institutions said the PBGC "is insolvent on the basis of Generally Accepted Accounting Principles (GAAP) and would be shut down if it were a private insurer."
That was before the PBGC absorbed $6.2 billion in pension obligations from Delphi.
US bankruptcy courts protect the assets of US corporations invested outside the United States from creditors. You can bet your mother's paycheck American Airlines' parent company, AMR Corp., has cash and assets stashed in ports all over the world.
Labor has a legitimate lien on Capital. A pension isn't a gamble or an investment -- it's earned with hard steadfast work.
A company that cancels its pension obligations should not be permitted to profit from it. The trend toward bankruptcy as a growth industry in the United States is a clear indication that we aren't in a recession. We are experiencing a restructuring at the expense of everyone who works for a living.
We won't win this struggle in court. The operative word for rank-and-file workers isn't competition, concession, or compromise. The operative word is "Occupy."
Bankruptcy at American Airlines shouldn't be allowed to fly.
I also wonder about "bankruptcy as a growth industry" and who will end up paying the ultimate price as companies "restructure" their pension plans. This is why I believe in guaranteed pensions for all, not just for public sector workers. These pension protection funds are under severe stress and it will only get worse. It's time we learn from failure and move on to a better solution, one that secures the retirement income of all workers, putting their interests first.
Below, Jeff Rose of GoodFinancialCents.com explains what happens to workers' pensions when their company goes belly up. Keep in mind, while pensions are guaranteed, benefits will be sharply reduced. I also embedded another clip which makes you wonder why US and Canadian carriers can't be more like Asian carriers., especially when it comes to customer service. Just ask Alec Baldwin who spoofed his latest incident on SNL (watch controversy below).