UPDATE:PBGC:Pensions Of 5 Cos In Crisis Underfunded By $400 Million
September 24, 2008: 04:03 PM EST, CNN Money
By Sarah N. Lynch
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The pension plans of five key companies in the
ongoing mortgage crisis are underfunded by $400 million, a situation that could
put pressure on the bottom line of the already cash-strapped Pension Benefit
Guaranty Corp. should it have to intervene in the underfunded plans.
PBGC Director Charles E.F. Millard said it is too soon to say whether it might
have to get involved with any of the pension plans. But Millard told lawmakers
at a congressional hearing that the plans of Lehman Brothers Holdings Inc. (
LEHMQ), Fannie Mae (FNM), Freddie Mac (FRE), Indymac Bancorp Inc. (IDMC) and
American International Group Inc. (AIG) are underfunded by $400 million.
If all five of those companies were to terminate their plans, the PBGC would
have to pay out about $100 million in pension benefits, Millard added.
"It is not all clear what will actually happen, but that is the magnitude of
things," Millard said, although he noted that a takeover of all five plans may
not be likely since AIG, Fannie Mae and Freddie Mac haven't declared bankruptcy.
Millard said the agency would be able to pay the amount needed without a
problem if it had to, but the long-term financial health of the PBGC is already
in jeopardy.
It currently faces a $14 billion deficit. To help bolster its budget, the PBGC
implemented a new investment policy in February that, once fully implemented,
will allow the PBGC to put up to 45% of its investments in equities. The new
strategy was enacted to avoid a government bailout.
In a recent report, however, the Government Accountability Office criticized
the PBGC, saying the investment policy carried more risk than it acknowledged.
And now, with the stock market in disarray, lawmakers are more concerned than
ever about the financial stability of the PBGC and how such a strategy could
affect the financial health of the corporation.
"The recent trauma on Wall Street only makes it more important we examine the
financial condition of the corporation," said Rep. Jim Ramstad, a Republican
from Minnesota, who is the ranking minority member of the oversight subcommittee
at the House Ways and Means Committee.
Millard defended the investment strategy Wednesday, saying it is a long-term
plan to help the corporation get out of its deficit.
"My number-one concern is people want to change that investment policy," he
said.
The agency is slowly transitioning into the new policy, and 70% of its
investments are currently still in fixed income. But even before the decision to
change the policy occurred, the portfolio had some exposure to more risky
investments.
It has a net notional value of $2.8 billion in exposure to credit default
swaps, a type of insurance meant to protect lenders against borrowers who don't
pay. Those are the derivatives that have gotten companies such as AIG into
trouble. If all of the positions the agency is swapping against were wiped out,
the PBGC would face a net loss of $70 million.
In addition, 6% of the agency's portfolio is tied to mortgage-backed
securities, although Millard assured lawmakers that most of those investments
have strong bond ratings.
The PBGC's budget is funded by insurance premiums paid by plan sponsors,
assets received from terminated plans and from its own investment income.
As more companies freeze pension plans and offer 401K plans to new employees,
however, that source of income continues to dry up, said Barbara D. Bovbjerg,
director of education, workforce, and income security at the GAO.
Lawmakers criticized the agency Wednesday for failing to include them in the
decision-making process to change the investment policy, saying the PBGC barred
congressional aides from even sitting in on meetings.
They also lamented that the agency doesn't have access to more up-to-date
information on underfunded pensions. Because of the way federal reporting
requirements are timed, there is a lag in the data. The $400 million in
underfunded pensions at troubled firms tied to the mortgage crisis, therefore,
is based on data submitted at the end of 2007.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@
dowjones.com
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09-24-08 1603ET
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