1997 EMPLOYEE BENEFITS: PBGC'S FINANCES, REFORMS CHEER EMPLOYERSPosted On: Dec. 21, 1997 12:00 AM CST
When it comes to the financial condition of the Pension Benefit Guaranty Corp., what a difference a few years can make.
Since the late 1980s, the PBGC's financial position was deteriorating each year until it hit rock bottom in 1993 with a deficit of $2.9 billion in its main insurance program used to guarantee benefits to participants of failed pension plans the agency has taken over.
Federal legislators, among others, feared it was only a matter of time before the PBGC would need a U.S. Treasury bailout to avert a collapse and continue to be able to honor its obligations to participants in pension plans it had taken over.
Today, with an $869 million surplus, the agency's financial condition has so dramatically improved that benefits lobbying groups say it may be time for the agency to ask Congress to lower the insurance premiums that employers with defined benefit plans pay the PBGC.
Of several reasons for the PBGC's dramatic turnaround, the most significant has been the enactment of legislation in 1994 that gradually has ended loopholes in federal law that had allowed employers to underfund their plans and expose the PBGC to big losses when those plans were terminated.
The most significant change in the 1994 law requires employers with underfunded plans to speed up contributions. For example, a special rapid-funding rule that had required employers whose pension plans that were less than 35% funded to amortize new liabilities over roughly five years was extended to plans that were less than 60% funded.
Another change mandated the use of a conservative mortality table to end such abuses in which employers grossly underestimated their employees' life expectancies, which minimized plan liabilities and reduced their required contributions to the plans.
At the same time, the 1994 law boosted the PBGC's revenues by requiring employers with underfunded plans to pay higher premiums to the agency.
These changes have had the desired effect. Today, pension plan funding has never been better, while PBGC losses from plan terminations have sharply declined. Assets in its insurance programs exceed liabilities.
Other factors have played roles in the PBGC's recovery. The bull stock market of the past few years has provided the agency high returns on its equity investments, contributing to its improved financial condition.
The PBGC's improved financial condition is not just a triumph for the agency. It also is good news for employers. A sound financial base and a significantly reduced exposure to losses translates to stable -- and perhaps eventually lower -- PBGC insurance premiums for employers with defined benefit plans.
The agency's newfound financial strength also gave it the confidence to implement other changes.
In 1990, the PBGC began annual publication of its so-called Top 50 list, a compilation of the 50 worst-funded corporate pension plans. Agency officials thought corporate fear of the bad public relations generated by landing on the list would prod companies to boost plan funding. Publicity was one of few weapons the PBGC had -- at a time of weak funding rules -- to pressure employers to put more money into their underfunded plans.
But this year, PBGC Executive Director David Strauss, who assumed the top agency position after the sudden death of predecessor Martin Slate, axed the Top 50 list. With tougher funding rules and new requirements mandating employers to better communicate pension plan underfunding to employees, the Top 50 list had become obsolete, Mr. Strauss said. That move was welcomed by business groups who for years criticized the list because, they charged, the list inflated plan liabilities -- and unnecessarily scared participants about the security of their benefits -- by using interest rate assumptions that were too low.
The PBGC also scored points with employers for three other actions it took this year. One action involved the PBGC's audit program, used to determine if targeted employers have paid the correct termination insurance premiums to the agency.
Effective since October, the PBGC said employers selected for audits generally only would have to supply three years of premium-related information. The agency had been requiring six years of information.
That move was cheered by employers who said it was difficult and expensive to come up with old records. Under the change in policy, six years of information only will be sought if the PBGC discovers problems in its audits of an employer's first three years of premium-related information.
The two other actions involved giving employers terminating fully funded pension plans more time to meet various deadlines associated with the termination process and waiving for small employers a reporting rule for companies that fail to make required quarterly contributions.
While 1997 was a year of triumph for the PBGC after years of unrelenting bad news, all still is not bright and rosy for the agency. It still must deal with a steadily shrinking base of pension plans -- roughly 3,000 to 6,000 pension plans terminate each year -- as more employers shift to defined contribution plans.
But the PBGC's Mr. Strauss said he will use his position as executive director to rally support for defined benefit plans, which he said are a superb retirement income vehicle.