Not only is U.S. nuclear power firm Westinghouse Electric Co. LLC bankrupt and on the mat after a failed reactor project, its employees have been given another dose of bad news—something that came as a surprise: According to the U.S. government’s pension insurer, its retirement plan has a massive shortfall.

Reuters reports that although the vast majority of bankrupt companies with major pension deficits indicate that underfunding years before they file for Chapter 11, such is apparently not the case for Westinghouse, whose Westinghouse Electric Co Pension Plan, with about 9,700 participants, looked to be fully funded in its most recent report to the Department of Labor in 2015.

The Pension Benefit Guaranty Corp. has, contrary to Westinghouse’s own figures, estimated the pension plan is underfunded by $937 million.

That was revealed in previously unreported court filings in August, the report says. The shortfall is conditional on Westinghouse resorting to the tools of bankruptcy to terminate the plan—which would mean that the PBGC would step in, take over the plan and apply its more conservative accounting.

According to Westinghouse spokeswoman Sarah Casse, cited in the report, the company has not told the agency it will end the plan.

While Westinghouse, owned by Toshiba Corp. of Japan, is looking for bids on the company, it is asking potential buyers to assume the pension would be maintained and that annual contributions would continue near current levels.

But buyers expected to be attracted to the deal are likely to be private-equity investors who will probably not want to take on the obligations of a defined benefit plan and will probably insist, in the wake of the PBGC determination, that the company terminate the plan.

According to PBGC data, not only does the shortfall exceed the plan’s $926 million in assets but it would also be among the 10 largest for a pension shortfall, ranking ahead of Trans World Airlines in 2001 and Pan American Air in 1991 and 1992.

However, the claim doesn’t result from fraud or mismanagement, but a difference between how Westinghouse and the PBGC calculate how much must be set aside today to satisfy future pension benefits.

Under Department of Labor rules, Westinghouse is required to assume that a bond portfolio will earn a much higher rate of return than the current market rates.

PBGC, on the other hand, uses those current market rates in its calcuations—which indicate that more money is needed today to pay for retirees.

As a result, Joseph House, a principal at Palisades Capital Advisors and former head of the PBGC’s restructuring group, is cited in the report saying that PBGC claims in bankruptcy cases often catch other creditors off guard.

Employees have been caught off guard as well—and that could weigh on the company’s future, since Westinghouse has said in court documents that hanging onto its highly specialized engineers is key to its success. Until it filed for bankruptcy in March, the pension was one way to do so.

If the plan is terminated, that would result in more Westinghouse debt and less for other creditors, as well as possibly reduced benefits for plan participants.

In that case, participants will receive a guaranteed benefit from the PBGC, which currently hits a maximum at about $64,000 a year.

Any annual pension payments above that level could be lost, although there are exceptions.

Instant Insights /

Is Westinghouse pension plan melting down? Depends on how you calculate it

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