Pension corruption could dwarf S&L crisis, panel told

WASHINGTON Limited audits, poor regulation of private pensionfunds and a Labor Department "mindset" against enforcement havecreated an environment for fraud that could dwarf the HUD scandal andrival the S&L crisis, a House subcommittee was told last week.

Officials in the department's inspector general's office reciteda litany of "parallels" between the savings and loan crisis - whichis expected to cost taxpayers at least $165 billion over the next 30years - and problems that surfaced in its review of pension fundaudits by private accountants.

Raymond Maria, the Labor Department's acting inspector general,said the level of corruption in running nation's 870,000 privatepension plans, has mushroomed since the 1960s and '70s when abuseswere limited primarily to a few union-administered plans.

"The vulnerabilities in this asset-rich employee benefit planarena today are being exploited by a new generation of racketeers -attorneys, bankers, accountants, investment advisors . . .," Mariatold the employment and housing subcommittee of the House GovernmentOperations Committee.

Among the parallels between the S&L crisis and the potential fora similar financial fiasco with pension funds cited by Maria andother officials were that: Pension funds hold some $1.7 trillion in assets compared with nearly$1 trillion in federally insured deposits held by S&Ls. Less than 300 federal auditors are devoted to examining pensionfunds - about a twelfth the number of federal S&L examiners. Audits by private accountants have failed to turn up widescaleabuses of laws prohibiting insider dealings in both. The government ultimately is on the hook for insuring pensionersagainst the loss of promised benefits, just like S&L depositors areinsured against the loss of their deposits.

Maria said efforts by his office to address the problem havebeen frustrated by opposition from officials in a department "whichhistorically has turned its back on criminal sanctions."

As an example, he cited a Justice Department opinion last Marchsought by the Labor Department's former solicitor limiting thecriminal investigatory role of his office only to union-affiliatedplans.

In a sample study of 168 private pension plans with $6.7 billionin total assets, Maria's office found $18.7 million in either unfoundor undisclosed in private audits by public accountants.

The independent auditors failed to perform suggested auditprocedures in 31 percent of the cases and 51 percent of the auditslacked one or more disclosures required under the 1974 EmployeeRetirement Income Security Act.

If projected to the $1.7 trillion of pension plan assetscovering some 76 million workers and retires, the potential lossesthere alone could exceed $4 billion, said the subcommittee'schairman, Rep. Tom Lantos (D-Calif.).

That would compare with nearly $2 billion in estimated lossesthat Lantos' panel has uncovered in its investigation of allegedwrongdoing in Department of Housing and Urban Development programs.

Both Lantos and Maria characterized the inspector general'sreport as a "red flag" and "early warning" to the potential ofanother financial crisis.

"When similar early warnings were ignored about the savings andloan industry and about HUD program administration, the cost to theAmerican taxpayer and economy became staggering," Lantos said.

Maria and other witnesses suggested that the potential lossescould far exceed $4 billion because the Labor Department exempts 93percent of the pension plans - those with less than 100 enrollees -from a requirement that they have independent audits. "Further, wefound that IPA (independent public accountant) reports do not give afair opinion of the state of these plans because ERISA and the LaborDepartment regulations allow `limited scope reviews,' " Maria said.