Home > 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.
G.M.’s involvement means that Delphi workers - unlike
many unlucky employees of Bethlehem, United Airlines
and Polaroid - might not lose any benefits if their
plan were taken over by the government.
(G.M. also promised to assume all medical costs for
retirees if Delphi faltered, an obligation estimated at
$9.6 billion. Securities analysts have been parsing the
language of the promise, trying to determine if G.M.
must really shoulder this entire amount, and the extent
to which Delphi would have to pay G.M. if it rebounded
later. G.M. has its own heavy obligations to retirees
and can ill afford to take on more.)
Savvy investors know that the existence of these two
guarantees gives Mr. Miller great power - the right, if
he needs it, to make someone else pay Delphi’s large
and growing debt to its work force. If he plays his
hand skillfully, Delphi could end up shedding billions
of dollars of debt without depriving unionized
employees of any promised benefits.
To unload the pension fund, however, Delphi would have
to declare bankruptcy; a company cannot send an
unwanted pension plan to the government without first
persuading a bankruptcy judge that it cannot otherwise
survive. And if Delphi is to file bankruptcy, it may
have to decide quickly. New, stricter bankruptcy laws
take effect on Oct. 17, and companies that declare
bankruptcy after that date will face a range of
restrictions on how much they can pay in executive
bonuses and on how long they can take to work on their
reorganization plans.
Mr. Ross said that he was not privy to the negotiations
at Delphi but that he thought it likely that Mr. Miller
would declare bankruptcy before the law tightened.
"Delphi’s a big company," Mr. Ross said. "I think he’d
be very concerned about his ability to retain a whole
management team there" if he could not pay bonuses. And
controlling the schedule for reorganization is an
important tool for debtors negotiating with creditors.
"I would be shocked if he would give up the leverage
that that tool gives him," Mr. Ross said.
But other analysts speculated that Mr. Miller might
well delay a bankruptcy filing past Oct. 17 because he
could win wage concessions from the union if he kept
the pension plan going. "The carrot that he has to
offer is, ’If you keep working for an extra year, you
get more benefits, and those benefits are more valuable
to you because those benefits are guaranteed not by us,
but by G.M. and the P.B.G.C.,’ " said Jeremy I. Bulow,
a economics professor at Stanford. "That’s something
Delphi can use as a negotiating tool."
While that may be good news for Delphi, its workers and
its shareholders, it could be very bad news for G.M.,
the pension agency - and perhaps, ultimately,
taxpayers. "The policy problem is that we let companies
get this deeply in hock to the federal government,"
Professor Bulow said. "It’s kind of a rolling the dice,
a heads-I-win-tails-you-lose kind of thing."
COMPARED with Delphi, Bethlehem Steel looked grim when
Mr. Miller arrived in September 2001. Like other big
integrated steel makers in the United States, Bethlehem
had been fighting a losing 20-year battle with foreign
competition and low-cost domestic mini-mills. "I came
here to find a way not to file for Chapter 11," Mr.
Miller said upon his arrival. But by mid-October,
Bethlehem was in bankruptcy.
The company was being killed by its legacy costs - the
accumulated promises to retirees it had been making for
decades. Bethlehem had whittled down its work force
over the years in an effort to cut costs, but by doing
so it simply created more retirees to whom it owed
pensions and health benefits.
By the time Mr. Miller took over, the company had some
95,000 retirees and just 12,000 active workers to
generate enough revenue to pay their benefits - a
hopeless proposition. Retiree health care alone was
costing Bethlehem about $125 million a year. In the
1990’s, the stock market boom made its pension fund
look healthy, but when the boom ended and the pension
funds’ assets fell, the company had to make up the
difference. By November 2002, Bethlehem faced
liquidation.
That is when Mr. Ross stepped in. A big concern then -
as it is now at Delphi, the airlines and elsewhere -
was the pension plan. When the time came to turn it
over to the pension agency, officials there realized
that Mr. Ross was poised to set off as much as $550
million in extra "shutdown" benefits - available only
to workers idled by a plant closing - by briefly
shutting some operations before taking over. The
government would have to pay the workers’ basic
pensions in any case; federal officials thought that if
the workers were to get any additional money, it should
come from Mr. Ross. (Shutdown benefits are an option
that is also available to Delphi.)
Steelworkers applauded these arrangements, but the
pension corporation seized Bethlehem’s pension plan
before Mr. Miller had the chance to shut down
operations and activate the extra benefits. The union,
Mr. Miller and Mr. Ross all complained, but Mr. Ross
nonetheless found enough additional money to offer
retiring employees $50,000 buyouts and to set up a
trust fund to pay for LTV and Bethlehem retirees’
health insurance. "We felt a moral obligation to those
workers, even though we had no legal obligation," Mr.
Ross said.
In the end, what bothered Mr. Conway, the union leader,
was not so much Mr. Ross’s inability to wring more
money out of the pension system or his remarkable
profit on the deal. What troubled him, he said, was
that the country seemed unable to take any lessons away
from the demise of the steel companies and how it
affected so many working people. "It just staggers us
that America’s not caught on to what’s happening to
it," he said.
"Here’s Ford and General Motors, now competing against
a lot of U.S.-based transplant companies that have no
obligations to any work force," Mr. Conway added,
referring to the nonunion factories that Toyota, BMW
and other foreign-owned car companies have built in the
United States. "That’s a tremendous advantage. How does
a mature American industry that has obligations to its
work force compete with that?"
Because global competition is driving the trend, Mr.
Ross said the country should look for a new way - maybe
a value-added tax on imports - to bolster the
pension-insurance program or to provide health care to
retirees. He said he had suggested this approach to
some members of Congress, but in vain. "So far, they’ve
really seemed more interested in lashing out at China,"
he said.
For now, people approaching retirement are left to hang
on and hope.
"What happens is, typically, you’ve got a boat that
holds 40 and you need seats for 50 and people are all
trying to hold on till the end of their career and get
their promise," Mr. Conway said. "We frankly don’t know
how to do it, if there’s no other assistance out there
to help you do it. The P.B.G.C. isn’t the solution."