PBGC’s Early Warning Program

Marcia Wagner, founder of The Wagner Law Group, discusses how the Early Warning Program works and what will trigger it.

By PS | June 28, 2017
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With last December’s update of its Early Warning Program (EWP), the Pension Benefit Guaranty Corporation (PBGC) suggested that credit deterioration and a downward trend in cash flow, or other financial factors, would trigger the EWP. But in May, the PBGC indicated that it had neither expanded the program nor changed its monitoring criteria or the processes involved. However, while a change in a plan sponsor’s credit quality does not trigger an EWP review, the PBGC generally does include credit quality, along with other information, as part of the analysis. With that said, how does the EWP work?

Q: What is the PBGC’s Early Warning Program? 

A: Although the PBGC first issued published guidance with respect to its Early Warning Program in 2000, in Technical Update 00-03, the EWP has existed since 1992. In 1995, the Kennedy School of Government and the Ford Foundation awarded the PBGC the Innovations in Government Award for the EWP.

The EWP is not explicitly authorized under the Employee Retirement Income Security Act (ERISA). However, under ERISA Section 4042(a)(4), the PBGC has the authority to involuntarily terminate a plan “whenever it determines that the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.” Once the PBGC identifies a transaction that could jeopardize retirement benefits, and thus potentially adversely affect both plan participants and itself, it will meet with corporate representatives to negotiate additional contributions or security for their underfunded pension. It attempts to reach an agreement that takes both the PBGC’s concerns and the plan sponsor’s specific circumstances into account. If an agreement cannot be reached, the PBGC can file a complaint in district court under ERISA Section 4043 to involuntarily terminate the plan.

Q: What are the screening criteria for the EWP? 

A: The screening criteria have changed over time. In 2000, these were either: 1) a below investment-grade bond rating and a pension plan that had a current liability in excess of $25 million, or 2) the company, regardless of its bond rating, sponsors a pension plan that has current liability in excess of $25 million and an unfunded current liability in excess of $5 million. The current monitoring criteria reference a participant count of 5,000 or more and an underfunding threshold of $50 million or more. Both the participant count and the underfunding monitoring are determined on an aggregate controlled group basis.