GAO Offers Long-Term PBGC Fixes

October 29, 2003 (PLANSPONSOR.com) - With the Pension Benefit Guaranty Corporation (PBGC) facing more challenges on the road ahead, the General Accounting Office (GAO) sees some room for improvement.

Motivating the GAO to make its recommendations are two primary risks the agency sees facing the overall long-term financial viability of the PBGC.   First is the possibility for acceleration of the large losses seen in 2002 and second, revenue from premiums and investments might be inadequate to offset program losses.

Even though the GAO does not see any immediate crisis, the potential for threats to the long-term viability acts as an impetus for action, according to the GAO.   Recommended by the agency then are several types of reforms for consideration to reduce the risks to the single-employer program’s long-term financial viability.   Included in these reforms are strengthened funding rules applicable to poorly funded plans, modifying program guarantees, restructuring premiums and improving the availability of information about plan investments, termination funding status and program guarantees.

Strengthen Funding Rules

Through strengthening plan funding rules, the GAO sees an avenue to reduce program risks.   Specifically, the GAO says the funding regulations could be strengthened to increase minimum contributions to underfunded plans and allow additional contributions to fully funded plans.   With this approach, not only would plan funding be improved but also the PBGC would see a limitation on its losses when a plan is terminated.

These additional funding requirements should then be based on plan termination liabilities, rather than current liabilities, the GAO recommends. Since plan termination liabilities normally exceed current liabilities, the GAO sees such a change improving plan funding and overall reducing potential claims against the PBGC.

Also included in the overall shore up of funding rules is a change to the requirements for making additional funding contributions.    Currently, the Internal Revenue Code (IRC) requires sponsors to make additional contributions under two circumstances, depending on the funding level of the plan over the previous three years – if the value of plan assets is less than 80% of its current liability or if the value of plan assets is less than 90% of its current liability.   By raising the threshold then, more underfunded plans would be required to make additional contributions, the GAO reasons.

Modify Program Guarantees

By modifying certain guaranteed benefits, the losses incurred by the PBGC could be decreased, the GAO contends.    To modify these losses, amendment of the Employee Retirement Income Security Act (ERISA) would be necessary, specifically to p hase in the guarantee of shutdown benefits, expand restrictions on unfounded benefit increases and expand restrictions on unfunded benefit increases, the GAO says.

This approach is not without its complications however as even though it could preserve plan assets by preventing additional losses that PBGC would incur when a plan is terminated, participants would lose benefits provided by some plan sponsors.

Through changing premiums, the GAO sees the potential for action occurring on two fronts.   One is the increase in PBGC's revenue and providing an incentive for plan sponsors to better fund their plans. To accomplish this, various actions could be taken starting with an increase or restructuring of the variable rate premium.

The current variable rate premium of $9 per $1,000 of unfunded liability could be increased or adjusted so that plans with less adequate funding pay a higher rate. In addition, premium rates could be restructured based on the degree of risk posed by different plans, which could be assessed by considering:

  • the financial strength and prospects of the plan's sponsor
  • the risk of the plan's investment portfolio
  • participant demographics
  • the plan's benefit structure

Looking at the pros and the cons though, the GAO offers both an advantage and a disadvantage to such a move.   On the plus side, is that an increase or restructuring might improve accountability by providing for a more direct relationship between the amount of premium paid and the risk of underfunding.   However on the other hand, such a move could further burden already struggling plan sponsors at a time when they can least afford it, or it could reduce plan assets, increasing the likelihood that underfunded plans will terminate, the GAO found.

Increases could also be levied in the current fixed-rate premiums of $19 per participant annually.   Further, the GAO recommends indexing the rate to the consumer price index so that changes to the premium would be consistent with inflation. The downside is that any increases in the fixed-rate premium would affect all plans regardless of the adequacy of their funding.

The GAO cautions though that premium changes that are not based on the degree of risk posed by different plans may prompt financially healthy companies to exit the defined-benefit system and discourage other plan sponsors from entering the system.

A copy of the complete report can be found at http://www.gao.gov/new.items/d0490.pdf .

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