Bethlehem Steel Case Study

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With minimum funding requirements, ERISA continued to protect DB plan participants by creating a new government agency known as the Pension Benefit Guaranty Corporation. PBGC insurance became was mandatory for all basic-benefit DB plans. It was like the FDIC, which guaranteed deposits at U.S. banks. When an overfunded insurance plan was terminated, the benefits earned by employees were paid by the plans and PBGC had little to do with it. But, upon termination of an underfunded insured plan, PBGC became the trustee of the plan by taking the plan’s assets and paying participants benefits when they retired. For plans taken over by the PBGC in 2001, the benefits would be subject to a limit of $40,705 per year per participant. In 1979, the flat rate was changed to $2.60 and in 1986 was changed to $8.50. From 1987, premiums included a flat rate and variable rate charges. In 2001, premiums were $19 per plan participant in addition to $9 per year for every $1,000 that a plan’s liabilities exceeded in assets. After abuses in terminations of overfunded and underfunded insured plans, the government placed restriction on plan termination in 1986. An employer was required to pay a 10% penalty tax on money reclaimed from the plans if overfunded. Eventually this problem continued so much that the penalty tax was increased to 50% in 1990. For underfunded plans, the plan could not be terminated unless the sponsor company had filed for bankruptcy or PBGC decided the plan caused distress to the sponsor. Furthering the incentive for firms to create pension plans is the idea that defined benefits is tax deferred. This means that neither the employer nor the employee will have to pay tax on the initial contributions or accumulated earnings.

The market conditions in 2001 did in fact have a large impact on the Bethlehem Steel pension plan. As the value of the market decreased in 2001, the value of the Bethlehem’s assets decreased simultaneously. The interest rates decreased from October 15, 2001 from 4.66% to 4.35% in December 31, 2001 which also increased Bethlehem’s Liabilities. They were underfunded by a very-large amount that was also under-calculated and the market conditions only exacerbated their situation. The pension plan was overfunded and Bethlehem promised more than they could deliver to their retirees and employees exceeding their budget in an already shrinking organization (less employees, higher expenses, undercut by competitors, steel crisis) just accelerating their way filing for chapter 11. The equity market was very bearish from an already weak and volatile market as well as the September 11th attacks, which in turn had a direct correlation to speeding up the collapse of the Bethlehem steel pension plan.

Anita Cavell will need to talk to her father about the perilous condition of his pension plan. Due to the poor market conditions and the unstable nature of Bethlehem Steel’s overall performance, it is likely that her father’s pension will be significantly lower than originally planned on. Her father may need to hold off retirement for several more years in order to lay away stronger, and more stable, retirement savings.

We would advise the corporation to use an accumulated benefit obligation plan for their pension instead of a projected benefit obligation plan. Payments into the pension fund should be made at the end of each month to avoid having an underfunded pension plan as well as paying unnecessary fees to the PBGC. We would also recommend that in addition to maintaining a funded payment plan, the company be very careful in choosing how to invest the pension trust to minimize the risk of replacing any loss on investment.

If in a position to advise the President, we would recommend that the fee for an underfunded pension plan be increased. Raising the fee on companies with underfunded pensions would increase the amount of money available to the PBGC to be paid out to terminated pensions, as well as discourage participating companies from having an underfunded pension altogether.