PBGC may need a financial safety net of its ownReprints
Forty years after it was created, the future of the federal agency that guarantees employees' and retirees' pension benefits is in doubt.
The Pension Benefit Guaranty Corp., a cornerstone of the Employee Retirement Income Security Act of 1974, was formed so that pension plan participants would have the security of knowing that their vested benefits would not be lost even if their employers failed and had not fully funded promised benefits.
Those benefits are — up to certain limits — guaranteed by the PBGC's single-employer insurance program. In turn, that program is funded by premiums paid to the PBGC by all private-sector employers with defined benefit plans, as well as by the investment income the agency earns on those premiums and on assets in failed plans that the agency takes over.
There is near-universal agreement that the agency has achieved its congressional objective of guaranteeing participants benefits.
Since 1974, the PBGC has taken over more than 4,600 pension plans from employers who failed and went out of business or could prove that they could not continue to operate if they had to continue to fund their pension plans.
Each month, the PBGC sends checks to well over 800,000 participants in plans the agency has taken over, many of them sponsored by employers that filed for bankruptcy and then went out of business.
In all, the PBGC last year paid more than $5.5 billion to participants in those failed plans.
Those figures are more than just numbers. The monthly checks have given many participants the money they need to buy basic essentials.
“It means money for gas and groceries,” said Kim Andrews, a 62-year-old retired steelworker in Williamsport, Pennsylvania, referring to the $165 monthly check he receives from the PBGC. In 2003, the PBGC took over the massively underfunded pension plan of Bethlehem Steel Corp., the failed Bethlehem, Pennsylvania-based steel producer, and assumed responsibility for paying more than $3.6 billion in benefits Bethlehem promised but did not fully fund to the plan's nearly 70,000 participants, including Mr. Andrews.
Providing that pension benefit safety net has been the PBGC's crowning achievement, observers say.
“It is unforgivable to let a person work, earn a pension and not get it. A retiree can't start out all over again. That is what used to happen, but no longer” because of the PBGC, said Frank Cummings, a Washington pension attorney, who as a congressional staffer, helped draft versions of the legislation that later became ERISA.
“The PBGC has a tough and a very important job. Millions of Americans have been able to have a secure retirement because the PBGC has stepped in. Its pension insurance program has been extremely valuable,” said James Klein, president of the American Benefits Council in Washington.
“The PBGC has been an extraordinary success,” added Karen Ferguson, director of the Pension Rights Center in Washington.
But like many of the employers whose pension plans the PBGC has taken over, the agency's financial condition is shaky.
In 2014, the PBGC reported a $19.3 billion deficit in its single-employer insurance fund. In addition, the agency puts its potential exposure to future losses from financially weak companies at $167 billion.
By contrast, the agency last year collected just $3.8 billion in insurance premiums from the 22,300 employer plans covered by its insurance program.
With more than $88 billion in assets, the PBGC is in no imminent danger of running out of money to pay guaranteed benefits to participants in plans the agency has taken over.
“That would not be happening for a very long time,” said Alan Glickstein, a senior retirement consultant with Towers Watson & Co. in Dallas.
That said, there is one big worrisome trend: The number of employers who pay premiums to the PBGC and the number of participants in those plans is shrinking.
The 22,300 plans paying premiums to the PBGC is a record low. In just one year, the number of insured plans fell by more than 1,000, with a 25% drop in just a decade.
A key driver of that falling number of defined benefit plans is that few employers have been setting up new plans, preferring to set up defined contribution plans, for which they pay no PBGC premiums and for which, unlike defined benefit plans, investment risk is shifted to employees.
At the same time, long-time big employer sponsors are moving away from the plans. For example, as recently as 1998, 90% of Fortune 100 companies offered defined benefit plans to new salaried employees. In 2013, the last year complete information is available, just 30% did, according to a Towers Watson survey.
In addition, the PBGC's premium base is being eroded by the biggest current defined benefit trend: pension “de-risking.” That is a term used to describe employer efforts to shrink the size of their pension plans, such as by selling off the liabilities to insurers through the purchase of group annuities and giving certain participants, especially former employees, the option to convert their monthly annuity benefit to a cash lump-sum benefit.
By reducing the size of their pension plans, employers face less exposure on how interest rate fluctuations and investment results can affect required contributions to their pension plans.
And a smaller pension plan means a reduction in PBGC premiums, whose base rates, due to hikes approved by lawmakers in recent years, have been soaring. Next year, the base premium will be $64 per plan participant, up from just $35 as recently as 2008.
While perhaps not the principal reason for de-risking, escalating PBGC premium rates are a factor moving employers away from defined benefit plans.
Those rates are “a fixed cost that has increased excessively in a short amount of time,” said Kathryn Ricard, senior vice president for retirement policy at the ERISA Industry Committee in Washington. “You start looking at other ways to manage that cost.”
“The higher the premium, the harder employers will look to lower that tab,” Towers Watson's Mr. Glickstein said.
The implications of pension de-risking on the PBGC financial balance sheets are largely negative.
“The real concern is the agency's premium base is shrinking,” said Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council in Washington.
In theory, the PBGC's exposure to losses are reduced if pension plans are smaller. But so far, many of the employers who have opted for de-risking approaches have been financially healthy, said Bruce Cadenhead, chief pension actuary at Mercer L.L.C. in New York.
The result, experts say, is that de-risking, over the long run, may be a negative for the PBGC, with little change in its exposure to losses but less premium income.
Still, the outlook for the PBGC and its insurance program is not entirely negative. First, if interest rates rise, that would lower — perhaps significantly — the PBGC's deficit, reducing if not eliminating the need for future increases in PBGC premiums.
“Low interest rates have created an impression of a bigger problem than there really is,” Ms. Dudley said, referring to the PBGC's deficit.
In addition, employer interest in offering defined benefit plans could pick up, swelling the PBGC's premium base, if government regulators become more accepting of allowing employers to offer more innovative benefit designs, said Joshua Gotbaum, a former PBGC director and now a guest scholar at The Brookings Institution in Washington.