CBO Estimates $71B PBGC Deficit by 2015

June 10, 2005 (PLANSPONSOR.com) - The nation's insurer of private-sector pensions could be faced with a $71 billion deficit by 2015, according to a new estimate.

Douglas Holtz-Eakin, director of the Congressional Budget Office, told the US House Budget Committee that the Pension Benefit Guaranty Corporation’s (PBGC) current $23.3 billion deficit could soar to that figure because the insurance premiums paid by employer-sponsored defined benefit programs aren’t keeping pace with the crush of failing plans for which the agency is taking responsibility, the Associated Press reported (See  PBGC Posts Record Deficit in FY2004 ).

Holtz-Eakin said current premiums would have to be increased fivefold to cover the projected deficit, which he acknowledged was based on a model for such projections still under development. “PBGC often reports that plans that appeared to be well-funded prior to termination turn out to be deeply underfunded when they are transferred to the agency,” said a  statement Holtz-Eakin submitted to the committee.

>In addition to discussing a premium increase and variable premiums based on pension program risk, the CBO noted that “another important correlate of plans’ risk that could provide a basis for adjusting premiums is the ratio of a pension plan’s assets in equities to its total assets.”   The CBO analysis noted that plan sponsors appear to prefer “a high proportion of equities because they expect higher average returns on stocks than on bonds” – but also noted that such investments “…entail the risk that the stock market will do poorly and the plan will become underfunded.”  

Stock “Picking”

>Consequently, the CBO’s opinion was that “Plans with a high share of stocks are thus at greater risk of underfunding when the sponsors encounter financial distress” – and that, according to the CBO report, results in an “…increase in risk to PBGC means that fair (full-cost) premiums would be about 16% lower for plans with an equity share of 30% rather than the average of almost 70% currently found in defined-benefit pension plans.”  

>As if that notion didn’t contain controversy enough for many plan sponsors, the CBO went on to note that “An alternative to relying on the incentive effects of risk-based premiums to reduce risk would be to limit, through law or regulation, the share of assets that plans could invest in stocks”, since the current premium structure “tends to disconnect them from risk because PBGC’s costs vary more closely with plans’ liabilities rather than their number of participants.”   CBO also noted that the per-participant charge also tends to lower the premium per dollar of insured liabilities for firms with a high proportion of older or high-wage employees compared with firms whose workforce is predominantly younger or lower paid and therefore has few accumulated pension benefits.

“Sound” Check?

>In Congressional testimony earlier this week, the GAO noted that “Current pension funding rules do not adequately ensure sound funding in plans that are at the greatest risk of termination, and the federal government needs to do more to hold employers accountable for the benefit promises they make.”  It went on to note that “…addressing deficiencies in the pension funding rules would be more effective and more important than reforming the PBGC premium structure, since policymakers should focus on getting employers to fulfill the promises they make to employees.”

>However, the GAO  report also noted, “PBGC’s current premium structure does not properly reflect the risks to

its insurance program and facilitates moral hazard by plan sponsors.”


Legislative Front


Also on Thursday  US Representatives John Boehner (R-Ohio) and Bill Thomas (R-California) unveiled a bill aimed at shoring up the PBCG while also encouraging employers to maintain their private pension programs (See  Latest GOP Pension Reform Bill Includes Advice ). 
Thomas said he suspected the bill may ultimately be folded into a broader retirement security package that also addresses Social Security and adjustments to defined-contribution savings plans such as 401(k)s. “By putting them together I believe it actually speeds up the process,” Thomas said. “Instead of having three highly charged partisan fights, we’ll only, unfortunately, have one,” he said, according to the news report.

Secretary of Labor Elaine Chao commended the efforts behind the new pension proposal, while nonetheless noting that,“In January, t he President proposed comprehensive pension reform to ensure that retirement promises made to American workers and retirees are kept, and Chairman Boehner’s bill builds on this foundation.”  That proposal (see Chao Releases Administration DB Reform Proposal ) was consistent in several areas with the Boehner/Thomas proposal, including proposals toreform the funding rules for private defined benefit pension plans, increasing the timeliness and effectiveness of worker disclosures regarding pension plan strenght, increasing the premiums paid to the PBGC, and imposing even higher rates on plans determined to be on less secure financial footing.  

The Administration’s proposal has drawn fire from several industry groups, including the ERISA Industry Council (see Trade Groups Continue Attack on Bush Pension Reform Proposals ) and the American Benefits Council (see ABC: Better DB Funding Status Disclosure Needed ) – primarily for the increase in premiums for well-funded programs, and based on concerns about the perceived volatility that could result from their proposed changes in determining funded status – concerns echoed by the United Auto Workers (see UAW Says Bush Pension Plan Would Wreck System ).

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