(Adds lawmaker comment, edits)
By Susan Cornwell
WASHINGTON, April 30 (Reuters) - The U.S. agency that bails out troubled corporate pension plans said on Wednesday that its deficit had swelled to around $5.4 billion in the first six months of its fiscal year, from $3.64 billion in 2002.
The Pension Benefit Guaranty Corp., which backs the pensions of 44 million Americans, said it had already absorbed most of the troubled plans in the steel industry and now faced exposure to underfunded airline and auto industry pensions.
"Based on our mid-year unaudited financial report the deficit has grown to about $5.4 billion," PBGC Executive Director Steve Kandarian told the House Ways and Means Committee. PBGC's 2003 fiscal year began Oct. 1.
With total pension underfunding exceeding $300 billion at U.S. companies, the Treasury Department proposed extending a temporary fix in the way pension liabilities are calculated, while it works out a more appropriate way to do it.
The suggestion by Treasury undersecretary Peter Fisher was criticized by some lawmakers who said they had hoped for more leadership in the quest to adequately fund traditional pensions -- and keep the agency that guarantees them solvent.
Many companies would like Congress to replace the 30-year Treasury bond with a composite rate based on corporate bonds, whose higher returns would lessen pension liabilities.
Of the $300 billion-plus in underfunding, Kandarian said $60 billion was attributed to the auto industry -- defined as automakers, autoparts producers and tire and rubber makers.
Airlines accounted for another $26 billion in underfunding, he said, adding that large network airline pension plans were only about 50 percent funded, on the average.
The agency recently assumed $600 million in liabilities from a US Airways pension plan for pilots.
Kandarian said UAL Corp.'s United Airlines, which is in bankruptcy court, might also seek to have the pension agency absorb some pension claims, but told reporters later: "We're not suggesting they should ... We're not suggesting they will."
TREASURY CRITICIZED
A sluggish economy, falling stock prices and low interest rates have all contributed to the underfunding of traditional pension plans that promise a fixed amount at retirement based on salary and years of service.
The PBGC had started fiscal 2002 with a $7.73 billion surplus but burned through that and more under the weight of large pension bailouts in the steel industry.
Low interest rates have dealt a particularly heavy blow to pension plans, which have been required to use the 30-year U.S. Treasury bond to calculate how much money is needed to guarantee future benefit levels.
But Treasury ended sales of the 30-year bond in October of 2001, and Congress last year gave companies temporary leeway to use an interest rate as high as 120 percent of the 30-year Treasury yield to determine plan funding requirements.
Fisher testified that Congress should extend the temporary solution, due to expire at the end of the year, for another two years while a permanent formula is sought.
"We believe that regardless of whether the (bond) discontinuation had occurred or not, there was already growing evidence and concern that the 30-year Treasury was becoming less relevant as a benchmark for use in pension calculations," Fisher said, but added: "We have not been able to come to a conclusion" on a replacement.
Two lawmakers who have proposed permanent pension funding rate reform, Ohio Republican Rob Portman and Maryland Democrat Benjamin Cardin, said they were disappointed that Treasury had not been able to come to a definite conclusion.
"It's been three years now we've been struggling with this issue. We could use a little leadership," Portman told Fisher.
Cardin and Portman's bill offers a permanent replacement for the 30-year Treasury with a measure based upon long-term high quality corporate bond rates. (Additional reporting by Jonathan Nicholson)