To prevent government meddling and the risk of
moral hazard, private-sector pension promises should rest
with the private sector, the author urges
James B Lockhart
Former PBGC director
It is a government retirement insurance program
investing billions of dollars in the stock market. Yet,
despite being a government agency with premiums arbitrarily
set by Congress, it has no government backing except a
minuscule committed loan facility. Apparently, it still is
unable to adequately forecast its future after working on a
model for seven years. All its premium income is required
to be invested in US government securities so that the
government can maintain the fiction that the premiums are
government income. Is it the Social Security program of the
The Pension Benefit Guaranty Corporation's current
condition is a much happier one than the state in which I
found it when I arrived there almost 10 years ago. Although
I was greeted with a rather na•ve editorial cartoon of my
predecessor putting up a sign in front of the agency's
headquarters--"Renovations Completed"--in reality, it would
have been in Chapter 11 if it were a private sector
company. Back then, PBGC had:
- A $2 billion net worth deficit,
- Many billions of claims and potential claims from
terminated pension plans,
- Unaudited and unauditable accounts,
- A premium billing system that had been shut down for
- A total mismatch of assets and liabilities, and
- A dizzyingly complex insurance policy and program
misunderstood by participants and the courts.
Over the last decade, the PBGC has made giant strides.
Its surplus now exceeds $5 billion and assets have grown
from $3 billion to more than $18 billion even though the
number of plans it insures continues to decline, as it has
for several decades. Markets, management, and legislative
reform have all been helpful. Indeed, PBGC has now been
depicted in editorial cartoons as a glutton, in contrast to
the image of my day as a small boy accepting a coin from a
bankrupt company. Now that PBGC's renovations are finally
nearing completion, it is time to reassess its future.
Although some people would say why argue with success, I
believe that PBGC's future should be outside the government
sector. PBGC still has basic flaws, including the moral
hazards of a government insurance program, the potential to
cause market distortions, and the tendency to provide a
tempting pot of money for politicians.
Specifically, these flaws are:
1. The moral hazard that almost brought PBGC down is still
here, albeit somewhat reduced by legislation. Unions ask
for benefit increases knowing a "government guarantee" is
there and companies agree because they will have years to
2. Companies are arguing again that PBGC's premiums are
too high, and that certainly is true in some cases. The
problem is that there appears to be no demand to underwrite
and price the insurance based on the risk of the sponsors
and their pension plans.
3. With the growing pot of money, the political
temptation to meddle is increasing. The meddling might take
the form of new, poorly funded defined benefit plans for
small businesses or, as in my day, the pressure from
liberal senators to guarantee the annuities of failed
companies like Executive Life.
4. There is always the political pressure to interfere
with collective bargaining or to intervene on behalf of a
specific company or union.
5. Alternatively, PBGC's policies and practices have it
interfering with many mergers, acquisitions and
6. The cumbersome and inefficient government accounting,
procurement, and budgeting systems, combined with the
inability to pay employees what they are worth, also could
lead to future problems.
7. Lastly, as the debate over Social Security investing
passively in equities rages on, the ability of a government
agency to invest actively in equities is questionable.
We are rightly asking welfare recipients, parents, students
and teachers to be more responsible. Perhaps, it is time to
ask corporations and unions to be more responsible also.
Privatization would do that.
Privatization could come in many forms. It could be a
demutualization, a rights offering to PBGC's premium payers
(corporations and/or pensions). It might come in the form
of an initial public offering of stock. Possibly, PBGC's
obligations to its 500,000 beneficiaries could be
annuitized, coupled with the authorization of AAA
private-sector companies to write the insurance.
The key result should be to put the private sector
pension promise back in the private sector. Underwriting,
premium setting, pension risk management, decisions about
corporate restructuring, and investing of premiums and
recoveries should all be in the private sector.
James B Lockhart III is senior partner of NetRisk, a
risk management and software advisory firm based in
Greenwich, Connecticut. He was executive director of
Pension Benefit Guaranty Corporation during the Bush