Former PBGC Head: Rising Rates Could Help Pension Underfunding

June 5, 2006 ( - Higher interest rates should help improve the overall US pension funding picture, the former chief of the nation's private-sector pension insurer said.

Bradley Belt, who recently stepped down as director of the Pension Benefit Guaranty Corporation (PBGC) (See  Head of PBGC Resigns ), told Reuters that the government’s current $450 billion estimated underfunding at US defined benefit plans could be slashed. “I would expect there to be some improvement in funded status, due primarily to higher interest rates,” Belt said. The agency has a $22.8 billion deficit.

As interest rates rise, companies can put less money aside to pay future pension benefits, because it is assumed they will get a better return on their investments.

Belt, who headed the PBGC for two years, will be replaced on an interim basis by acting director Vincent Snowbarger (See  Snowbarger Retakes PBGC Top Spot ).

While the outlook for the agency Belt just left depends on what happens at individual companies, if the funded status of pensions does not improve at struggling companies that are at a higher risk of terminating their plans, then “you still have a substantial risk to the pension insurance program,” he asserted.

The former pension insurance administrator declared that it was “critically important” that Congress complete a pension reform bill to close legal loopholes that have allowed underfunding to grow.

“Too many plan sponsors have taken full advantage of the laxity in the rules and have made the minimum required contributions, or in some cases, taken contribution holidays and not contributed anything to the plan,” he told Reuters.

Belt also warned employers that moving from a defined benefit to a 401(k)-type plan may not be the panacea some employers had envisioned.

While 401(k) plans appear less expensive for companies, switching to them may not save so much money in the long run, he said. When the employees discover at age 65 that they don’t have enough money in their 401(k)s to retire, they will stay on the job, and companies will keep paying their salaries, Belt said.

“They (companies) are still going to have legacy costs, because they are basically going to have a working pensioner,” Belt told Reuters. “They will be paying those same (pension) costs in but with a less optimal workforce.”

Members of a US Senate-House conference committee have been locked in negotiations since March about a sweeping pension reform bill, stuck over disagreements about whether to change rules to require companies with poor credit ratings, such as General Motors Corp., to put more cash in their pension plans, among a list of other issues (See  November Elections could be Pension Bill Monkey Wrench ).