Downgrades could have pension implications
By Stephanie Kirchgaessner in Washington and Bernard Simon in,Toronto
Published: May 9 2005 03:00 | Last updated: May 9 2005 03:00
General Motors' and Ford Motor's debt downgrade to junk status could affect the US carmakers' pension fund obligations under the terms of a proposal by President George W. Bush to revamp the agency that insures defined pension benefits.
A proposal by the administration, which is being debated by lawmakers, would force GM, Ford and other companies with a junk debt rating to increase the level of contributions to their own pension funds and premiums paid to the Pension Benefit Guaranty Corporation.
The PBGC reported a $23.3bn deficit at the end of 2004, a shortfall the agency has warned will expand if more companies slip into bankruptcy and offload their pension liabilities on to the government.
Under current rules, non-investment grade groups are subject to the same funding requirements as healthy, investment-grade companies.
Supporters of Mr Bush's plan say this policy has contributed to the recent increase in the number of underfunded pension funds.
If the administration's plan is approved by Congress, the PBGC said companies affected by a junk debt rating would not feel the full impact of the funding and premium increases for five years.
The use of a junk credit rating trigger to force troubled companies to make bigger contributions to their pension funds, however, has been sharply criticised by pro-business lobbyists.
Larry Zimpleman, president of retirement and investor services at The Principal Financial Group, said in testimony before Congress in March that using the creditworthiness of a company to determine pension funding rules would put "severe additional pressures" on companies already facing a downturn in their business cycle.
"The mere fact that a company's debt is not rated as investment grade does not mean that it will terminate its plans. However, the consequences of these 'false positives' could well be self-fulfilling," Mr Zimpleman said, speaking on behalf of the US Chamber of Commerce and other groups.
The PBGC has estimated that, as of the end of fiscal 2004, non-investment grade companies sponsored pension plans with $96bn in underfunding - almost three times the amount recorded at the end of 2002.
The agency has also found that nearly 90 per cent of companies representing the largest claims against the PBGC had junk-bond ratings for 10 years prior to the termination of their plans.
GM said that it did not support higher premiums for companies with fully-funded pension plans "when that money can be used to make their businesses more competitive".
It also noted that the PBGC proposal in its present form would require a sub-investment grade rating by all four major rating agencies. So far, GM and Ford have been downgraded to junk status only by Standard & Poor's.
http://news.ft.com/cms/s/068ee8b6-c026-11d9-b376-00000e2511c8.html
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