Retirement blues

Jul 30th 2003

From The Economist Global Agenda

As fears grow that America's pensions rescue fund may itself need rescuing, Britain's main business organisation predicts that pension-fund deficits will damage economic growth for several years

THE world's main stockmarkets are now about 25% above the low-point that they hit in March, shortly before the start of the war in Iraq. Unfortunately, this rise is nowhere near enough to wipe out the big deficits that many company pension funds built up during the preceding three-year slump in share prices. In recent days, American officials have given warnings that the Pension Benefit Guaranty Corporation (PBGC), the agency that rescues collapsed pension schemes, may itself need to be rescued by the government. And on Monday July 28th, the Confederation of British Industry (CBI) said that the "black hole" in British company pension funds-which it conservatively estimates at £160 billion ($259 billion)-will force firms to slash their investment, thereby stunting economic growth for several years.

In the stockmarket boom of the 1990s, since most pension funds were heavily invested in shares, they built up what were widely assumed to be comfortable surpluses. This even encouraged some companies to boost their short-term profits by taking "pensions holidays"-ie, suspending their contributions to the swollen funds of their staff pension schemes. But the extended slump in share prices has left many companies' pension funds with huge shortfalls, which in some cases threaten the firm's survival. Earlier this month, General Motors launched the biggest bond ever issued by an American company, to raise $17.6 billion, most of which will be put towards closing the estimated $25 billion deficit in its staff pension scheme.

The pensions of about 44m American workers are protected by the PBGC, which collects contributions from their employers' retirement schemes in return for a guarantee to come to the rescue if the pension fund becomes insolvent and the employer cannot make up the shortfall. In the 1990s this was rarely a problem: when firms went bust, their retirement schemes were usually in surplus so they could continue paying benefits to pensioners and their dependants. The PBGC itself thus enjoyed a growing surplus, which reached almost $10 billion in 2000. But this has been more than wiped out in recent years, as a steady stream of firms has gone bankrupt-some of them big ones, such as Bethlehem Steel and US Airways-leaving behind seriously underfunded retirement schemes. As a result, the PBGC now has a record deficit of about $5.4 billion.

Earlier this month Steven Kandarian, the PBGC's boss, raised the possibility that his organisation might need a "general revenue transfer"-in plain English, a bail-out by taxpayers-unless either the stockmarket recovered or the PBGC charged the struggling pension funds higher premiums. Last week, the General Accounting Office, the investigative arm of America's Congress, declared the PBGC's guarantee scheme for company pensions at "high risk", calling for urgent action. The labour secretary, Elaine Chao, said the Bush administration was proposing changes to make pension funds measure their liabilities more accurately and to stop them increasing pensions when they have insufficient reserves.

Such measures, though, are unlikely to make much short-term difference to the PBGC's precarious condition. Companies with big pension deficits are continuing to go bust: in the latest such case, on July 24th the PBGC took over the pension scheme of Thunderbird Mining, of Minnesota, following the bankruptcy of its parent, Evtac. The scheme's liabilities are about double its assets, and the PBGC expects the rescue to cost it about $37m. Ironically, the fears about the PBGC's future come as Britain is considering setting up a similar body to rescue troubled pension schemes.

The situation is most serious in Britain and America because, among the rich countries, these are the two where company pension schemes are most popular. Standard & Poor's, a credit-rating agency, reckons that companies in its S&P 500 share index have combined pensions deficits of about $226 billion. The CBI says its estimate of total shortfalls of £160 billion for British firms does not include those of financial firms; nor does it include the cost of a proposed law which would force financially healthy firms to make good any deficits in their pension schemes before being allowed to close them, as some are seeking to do. Including these and other factors, some estimates of the black hole in Britain's company pensions go as high as £300 billion. Some large companies are using their surplus cash to reduce the size of this hole: on Tuesday BP, an oil and gas giant, said it will spend up to $2 billion in the second half of this year to narrow the deficit in its American pension schemes, whose assets are worth less than two-thirds of its liabilities.

A tough new accounting rule, FRS17, which will be fully enforced from 2005, will force British firms to account for their pension funds' assets at market value (as opposed to "smoothing out" the effects of stockmarket volatility) and any deficits in the retirement scheme will have to be set against the firm's profits. So by 2005, the CBI reckons, British firms will have been forced to more than double their pension contributions, compared with those they made in 2000, to £43 billion. This will leave them with much less money to invest. Since business investment is currently one of the main drivers of Britain's economic growth, it could mean the country is in for several years of low growth. And since pension contributions are tax-deductible, the government will suffer a direct loss of up to £2 billion a year in tax revenues.

While some firms are seeking to wind up their pension schemes and get out of the business of helping employees to save for their retirements, many more are taking the less drastic step of ceasing to offer "defined-benefit" or "final salary" pensions-ie, ones which pay a guaranteed proportion of a worker's salary on retirement. These firms' new recruits are being offered "defined-contribution" pensions, in which the value of their future pensions will not be guaranteed, but will depend on how well or otherwise their pension fund's investments perform-thereby transferring the risks from the employer to the employee. However, these companies still have many existing employees who have been promised final-salary pensions, and thus will continue having to bear the investment risks associated with these.

America's Congress and Treasury are looking at various proposals to ease the pensions crisis, such as raising the limits for tax deductions on pension contributions. This would encourage firms to build bigger pension surpluses while investment returns are good, so they have a bigger cushion when the markets turn bad. Some pundits (who were out of fashion when stockmarkets were booming but are now being listened to) argue that shares are too risky for pension funds, and that they should put their money into something safer, such as inflation-linked bonds. But bond prices are widely seen as overvalued, so now may not be the best time to start buying them. Perhaps all that pension-fund chiefs can do, then, is to hope that the past three years have been an aberration and that shares now return to being the excellent investment they were in the 1980s and 1990s.

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L'Express du 07/08/2003

Etats-Unis

Fonds de pension, la bombe à retardement

par Julie Joly

Les déboires boursiers menacent les retraites de 44 millions d'Américains

Le directeur de l'organisme d'assurance publique pour les fonds de pension américains n'en dort plus la nuit: créée en 1974, la PBGC (Pension Benefit Guaranty Corporation) enregistre cette année un déficit historique de 5,4 milliards de dollars. Il y a encore deux ans, ses comptes affichaient 7,7 milliards de bénéfice. Pour les quelque 44 millions de salariés et de retraités concernés outre-Atlantique, tous bénéficiaires de régimes de retraite dits à «prestations définies», ce sont environ 300 milliards de dollars de rente qui sont sur la sellette.

Au cours de 2002 seulement, la valeur des fonds de pension assurés par la PBGC a chuté de 11%, soit une perte sèche de 106 milliards de dollars. Or, ces derniers temps, pour éviter de grever leurs comptes déjà bien entamés par les déboires économiques et boursiers, nombre d'entreprises, aux Etats-Unis, ont largement sous-provisionné leur régime de retraite. Du coup, au moment d'honorer leurs dettes envers leurs salariés, elles se retournent vers leur assureur... Lui-même totalement démuni!