September 18, 2005
Whoops! There Goes Another Pension Plan
By
MARY WILLIAMS WALSH
ROBERT S. MILLER is a turnaround artist with a Dickensian twist. He unlocks hidden value in floundering Rust Belt companies by jettisoning their pension plans. His approach, copied by executives at airlines and other troubled companies, can make the people who rely on him very rich. But it may be creating a multibillion-dollar mess for taxpayers later.
As chief executive of
Bethlehem Steel in 2002, Mr. Miller shut down the pension plan, leaving a federal program to meet the company's $3.7 billion in unfunded obligations to retirees. That turned the moribund company into a prime acquisition target. Wilbur L. Ross, a so-called vulture investor, snapped it up, combined it with four other dying steel makers he bought at about the same time, and sold the resulting company for $4.5 billion - a return of more than 1,000 percent in just three years on the $400 million he paid for all five companies.
Two years later, as the chief executive of
Federal-Mogul, an auto parts maker in Southfield, Mich., Mr. Miller worked on winding up a pension plan for some 37,000 employees in England. The British authorities balked at the idea, fearing that such a move would swamp the pension insurance fund that Britain was creating; it began operations only last April. But the investor Carl C. Icahn has placed a big bet that Federal-Mogul will pay off after the pension plan is gone; he has bought its bonds at less than 20 cents on the dollar and is offering money to help the insurance fund. He, too, stands to make millions.
Now Mr. Miller is at
Delphi, the auto parts maker that was spun off by
General Motors in 1999. If past is prologue, one of the most powerful turnaround tools at his disposal will be his ability to ditch Delphi's pension fund. He did not return numerous telephone calls seeking his views for this article, but in the past he has said that his first priority at Delphi was to "resolve" its "uncompetitive labor cost structure." That includes the roughly $5.1 billion gap between the pensions it has promised employees and the amount it has put aside to pay for them.
If the obligation to make good on Delphi's pensions eventually lands, in whole or in part, at the door of a governmental guarantor, few should be surprised. The Pension Benefit
Guaranty Corporation has become an increasingly popular option for private-capital funds and other investors who are seeking to spin investments in near-bankrupt industrial companies into gold. The key is to shift the responsibility for pensions, which weigh as heavily as bank loans on a company's balance sheet, to the pension corporation.
The same financial alchemy has been performed at Polaroid and US Airways, at textile companies like Cone Mills and WestPoint Stevens, and at a host of smaller companies over the last four years. And bankruptcy specialists say that it is almost certain to keep happening, because shedding pensions - and pensioners' health care obligations - is turning into an irresistible way to make a high-risk investment pay off.
"It's become a kind of system to bail out companies," Thomas Conway, vice president of the United Steel Workers of America, said of the pension corporation, which Congress created in 1974 to protect retirees if their employers went bust. "People have been able to use it tactically, as a business strategy, and I don't think that's what Congress meant."
Over the long term, the rate of defaults is clearly rising, said Lynn M. LoPucki, a professor of law at the University of California, Los Angeles, who has tracked the large companies that have shed their pension plans while in bankruptcy since 1980.
Less obvious is precisely how the trend will ultimately affect retirees, who sometimes have their pensions cut in the process. The cuts appear to be hitting more and more workers, but the government has not calculated how many since 1998.
Nor is it certain how the trend will affect taxpayers, who may wind up on the hook if the rising tide of failed pension obligations overwhelms the resources of the pension corporation. A year ago, when the agency last reported its balance sheet, it had $39 billion in assets and $62.3 billion in liabilities, leaving a shortfall of $23 billion. The Congressional Budget Office on Friday estimated that the deficit will widen to $86.7 billion by 2015 and $141.9 billion by 2025.
Mr. Ross, the investor who picked up the five dying steel companies, said he also thought that the current practice of sending failed pension plans to the federal guarantor "needs some reforming."
But, he added, the private sector was not to blame. "If we're going to continue defined-benefit pension plans at all," he said, "I really think we need to look at who enforces the rules, what the rules should be, and why there isn't a meaningful, risk-based system."
In a risk-based pension insurance system, companies that run failure-prone pension funds would pay higher premiums than the companies that manage their pension plans more conservatively. But instead of charging more, the government has been waiving the pension rules, he said. "When you start giving people waivers," he said, "you're creating a time bomb."
Like defaulting on a loan, terminating a pension plan significantly lightens a company's balance sheet: the business instantly becomes more valuable because it does not have to use its cash flow to pay for past mistakes.
But defaulting on a loan affects the lender, who presumably vetted the borrower and charged interest commensurate with the risk. Defaulting on a pension, on the other hand, affects the pension corporation, which is required by law to accept a low premium unrelated to the risks it takes.
James A. Wooten, a pension-law historian who is a professor at the University at Buffalo Law School, said that Congress knew it was creating an imperfect system when it established the pension corporation in 1974, and that it expected to make improvements later. The bill was highly contentious, and Congressional leaders struggled mightily to achieve compromise in the last chaotic months of the Nixon presidency, with the Watergate scandal roaring around them.
In the beginning, they set pension insurance premiums at a token $1 per employee. Today, the basic premium is up to $19 a head, but Congress has found it hard to raise the rates even remotely enough to cover growing claims. Some companies have warned that if they have to pay more for their pension insurance, they will stop offering pensions.
"They took cautious steps, and those cautious steps weren't enough to prevent the abuse of the insurance program," Mr. Wooten said. "Once there's insurance, you have an incentive to run up liabilities to get more out of the insurance."
MR. MILLER'S arrival at Delphi in July, and the intense labor negotiations that have followed, are signals that the auto parts industry may be in for a long cycle of bankruptcies and restructurings, like those that reshaped steelmakers and are beginning to transform airlines.
"Something has to happen to all of these liabilities and cost structures," said Mr. Ross, who has said that he may invest in Delphi, the world's largest auto parts supplier, after those changes are made. "Delphi needs to sort out these complicated relationships before anybody will buy it. Something has to change."
Delphi isn't the only troubled automotive company to catch Mr. Ross's eye. He has also expressed an interest in Collins & Aikman, a manufacturer of automotive interiors that is already in bankruptcy, and he recently invested $30 million in a French auto parts maker, Oxford Automotive. But because of Delphi's size and its relationship with G.M., its former parent, any big cuts in its so-called legacy costs - mainly pensions and retiree health care - would send reverberations through the auto industry.
No one says it will be easy for Mr. Miller to cast off Delphi's pension plan - it never is - but he was dealt a good hand when he came to the company. Not only would the federal pension guarantor end up with at least part of Delphi's plan if the company went bankrupt, but the company could also rely on an unusual promise that G.M. made to the United Automobile Workers seven years ago - in far better times - that it would take over any part of the Delphi pension plan that the pension agency refused. Generally, the agency caps pension payouts at about $45,000 a year, to workers who are 65 when the plan fails. For younger workers, the limits are a good deal lower.
) appointed to boards of directors. Gee, how's that work?
