How secure is your pension?

The Cram-Down Decade
You met your obligations; your employer didn't. Result: You're screwed.
By Daniel Gross
Posted Friday, May 20, 2005, at 1:11 PM PT

It may seem awfully premature to start thinking about defining the decade in finance. But if you start counting from Jan. 1, 2000, it's more than half over. And in this age of the Feiler Faster thesis, it's never too early.

And so Moneybox hereby declares the zeros (the oughts?) the Decade of the Cram Down.

In corporate finance, a "cram-down deal" is defined as a transaction "in which stockholders are forced to accept undesirable terms, such as junk bonds instead of cash or equity, due to the absence of any better alternatives." More broadly, it's what happens when stakeholders who have met their obligations are nonetheless forced to accept returns or compensation that are far less than they were promised. Frequently, cram downs occur because the entity charged with managing the investment has screwed up—it frittered away cash or went bankrupt. And this is the theme that is defining personal, corporate, and government finances this decade.

The cram-down trend started with defined-benefit pension plans, the kind that are prevalent in unionized, old-economy industries. When the 1990s boom ended, many companies with large pension plans began to fail, especially in the steel and airline industries. Not surprisingly, many of these failed companies didn't bother to fully fund their pension plans.

In many instances, bankrupt companies turn over their plans to the Pension Benefit Guaranty Corp. But if you're entitled to more than the maximum that the PBGC insures, tough. For example, the PBGC recently took over the pension plan of bankrupt United Airlines, which was underfunded by $9.8 billion. Since the PBGC would guarantee only $6.6 billion of those benefits, the workers—who had met all their obligations to United—took a $3.2 billion cram down.

Meanwhile, the PBGC itself is in deficit. As of last September, it had only $39 billion in assets to cover the $62.3 billion in guaranteed pension benefits it owes to more than 1 million workers. In other words, it doesn't have the resources to meet even the crammed-down plans. Oh, and the PBGC, which insures pensions for 44 million workers in 31,000 plans, is bracing for more pension failures.