Dallas Fed: PBGC's Future May not be Dire

September 30, 2004 (PLANSPONSOR.com) - Rampant news media predictions of a funding crisis by the agency that insures private pension plans are most likely off the mark.

That was a key conclusion by Federal Reserve Bank of Dallas researchers who say prospects for the Pension Benefit Guaranty Corporation (PBGC) may actually be better than recently reported because of the economic recovery, temporary legislative relief, and the conversion of many DB plans to cash balance plans. The trend of companies migrating to a defined contribution program will also help the overall funding picture, the researchers said.

The report said a traditional pension-to-cash balance change can have economic benefits in that a firm with an overfunded pension can use the excess cash remaining after the conversion in paying for retiree health insurance without triggering excise taxes. However the researchers acknowledged that cash balance conversions continue to be controversial with the experiences of IBM in the cash-balance arena closely watched in the pension community (See  Murphy’s Law: IBM Loses Cash Balance Ruling  ). By the late 1990s, approximately 11% of all traditional defined benefit plans had converted to cash balance plans, and they now account for an estimated 40% of all defined benefit assets.

Finally, firms with ailing pensions will get help from the April 2004 legislation changing the way pension liabilities are estimated, the researchers pointed out (See  Whew! Bush Signs Pension Relief ).

Particularly because of rampant pension woes among US airlines and steel firms, PBGC officials have warned for years about the agency’s financial picture.

“Many firms with defined benefit plans have weathered the recent economic turmoil without being forced into bankruptcy or jettisoning their plans,” the Dallas Fed researchers wrote in their  report . “On those firms bearing the entire risk of their pension plans, combined with other, industry-specific problems, are currently in distress. The net result is that the PBGC is likely to assume pension plans and its deficit will worsen in the short run. However, outside the steel and airline industries, a massive failure of defined benefit plans that would precipitate an S&L-style bailout of the PBGC is unlikely.”