Millard Responds to Committee Questions

Charles E. F. Millard, Director of the Pension Benefit Guaranty Corporation (PBGC) told the House Education and Labor Committee that PBGC’s operating results are subject to significant fluctuation from year to year, depending on the severity of losses from plan terminations, changes in the interest factors used to discount future benefit payments, investment performance, general economic conditions, and other factors, including changes in law.   As a result, he noted that PBGC has been in a deficit position for most of its existence.   The Education and Labor Committee has been conducting hearings to ascertain the impact of the recent financial crisis on the nation’s retirement security (see  House Committee Takes Retirement Investigation on the Road ).

Millard noted that at the end of fiscal year 2007, PBGC had assets of $68.4 billion to cover liabilities of $82.5 billion, resulting in an accumulated deficit of $14.1 billion.   He noted that the audited financial results for 2008 were not yet available, but that he anticipated that they would be available by the annual November 15 deadline.   “While we expect that the deficit will be somewhat lower for fiscal year 2008, we believe that the deficit still remains in double digits – somewhere in the range of $10 to $12 billion,” he said.  

Congressman Miller referenced criticisms raised by the Government Accountability Office regarding the PBGC’s new asset allocation strategy, as well as its concern that the softening economy could trigger a fresh wave of troubled pensions to be dumped at the doorstep of the nation’s private pension insurer (see  GAO: PBGC Investment Policy May be Riskier than First Thought ).   Millard noted that as of September 30, 2007, the value of equity securities in the PBGC’s portfolio was approximately 28% of total assets, compared to 23% at the end of FY 2006.   He also noted that, while the new investment policy statement and asset allocation had been approved (see  PBGC Makes Big Shift to Stocks, Alternatives ), that only “very small changes” have been made so far.   He reiterated that the kind of changes contemplated, the asset classes involved, and the sheer size of the portfolio would require, in some cases, years to fully implement (see  PBGC Puts Out Call for Asset Management Partners ).   The PBGC recently announced the development of a new standard that it had developed for managing portfolio transitions – and that it saw as a model for other programs (see  A New Track For Transitions ).

In prepared testimony, Millard had outlined the particulars of the new investment policy (see  Millard Defends PBGC Investment Policy Change ).

He responded to questions from Congressman Joe Courtney (D-Connecticut) noting that the losses registered by the PBGC portfolio were based on the old investment policy, not the new one.   He also noted that past recessions really haven't triggered an upsurge in the dumping of pensions on the agency.   Instead, he noted that claims against PBGC's insurance program tend to be a "lagging indicator of the economy", and that such claims generally follow a downturn in the economy by 18 months to two years.   He cited several situations (Bethlehem Steel, USAir and United Airlines) where the takeovers took place during an economic upturn, though those particular industries were struggling.   He reminded the panel that since its inception, about 41% of the agency's total claims were from the airlines industry, and another 36% were from the steel industry.  

Information Sources

Millard cited the PBGC's two primary sources of information on underfunded pensions; the Annual Report Form 5500, and reporting to PBGC under ERISA section 4010.   He explained to the House committee members that the Section 4010 reporting provided better and more timely information than did the 5500.   He noted that under section 4010 certain controlled groups with underfunded pension plans are required to report actuarial and financial information to the PBGC on an annual basis, information that "…enables PBGC to identify and monitor potential risks to the pension insurance system, to focus PBGC resources on situations that pose the greatest risks to that system, to assert appropriate claims against members of a controlled group, and to prepare its financial statements."

For example, he noted that 4010 filings are the only place where sponsors report plan underfunding, measured on a termination basis. In addition, he noted that financial information is reported for all members of the controlled group, not just the plan sponsor. "This is crucial

information because members that do not sponsor pension plans often provide a source of recovery for PBGC claims (should any arise) that is not available to other creditors," he explained.  

Congresswoman Lynn Woolsey (D-California) asked Millard "What would you do right now?", Millard said that the agency is not focused on "funded status in the short-term."   He said the agency is "trying to manage toward a different north star."

PPA Impact

One thing Millard would like to change - access to better information about the ability of plans to meet their pension obligations.   He told the committee that, prior to the Pension Protection Act (PPA), the requirement of section 4010 reporting applied if aggregate unfunded vested benefits in the controlled group exceeded $50 million.   But Millard noted that the PPA changed the 4010 gateway test from a dollar-based test to a percentage-based test.   Under PPA, filing is required if one (or more) plans in the controlled group has a funding percentage below 80%. As a result of this change, he noted, many long-time filers with plans that are underfunded by significantly more than $50 million will no longer have to file.   Because these are the plans that PBGC is most concerned about, the PPA changes greatly diminished the usefulness of 4010, according to Millard.   Moreover, he noted that many mid-sized plans with low funding percentages but relatively low dollar amounts of underfunding will have to file 4010 information for the first time - a burden for them, and information that Millard didn't seem to deem terribly important to the risk management undertaken by the PBGC.

In response to a question from Congressman John Sarbanes (D-Maryland), who appeared confused about the linkage between retiree medical, which the PBGC has no jurisdiction over, and pensions, which it does, Millard noted that about 85% of the retirees who get their pension check from the PBGC get 100% of their promised pension, though he reminded the panel that there is a statutory limit ($51,750 for 2008 - see  PBGC Benefit Limit Rises 4.5% for 2008 ).   That response didn't appear to mollify Sarbanes, who appeared more concerned about the issue of retiree medical coverage, and who said he was "…in constant quest of whether we have a pension system in this country - and finding out that we don't."

Millard reminded the committee that the PBGC takes on pension liabilities that are paid out "over decades, not years".   While, "as a rule of thumb, plans that come to us are 50-60% funded,", he noted that the PBGC is now about 70% funded.   "We get 7s, we pay 10s," he said.  

Future Concerns

As for areas of future concern, he reminded the committee that historical trends suggested that troubled industries bore watching, as much as individual firms.   At the moment, he said that the PBGC is concerned about employers in the healthcare sector, such as small hospitals, who have thin operating margins and are not-for-profit entities.   Millard said that the PBGC is proactively working with firms in that industry to help them avoid a funding problem with their pensions, a stance the agency acknowledged in their July 30 takeover of the pension plans of Auburn Memorial Hospital, a non-profit medical center in Auburn, New York (see  PBGC Takes Over Four Plans of NY Hospital ).

At the conclusion of Millard's testimony Miller said, "I appreciate your explanations, but not sure that I am satisfied."   He went on to say that "…diversification is not a defense during this downturn," and that he worried that "we not cloak this policy", which he acknowledged that he disagreed with.   "Those phrases have different meanings today, and may have for a considerable period of time," he said, continuing that he thought it was "incumbent on this committee to tease these things out."  

"It is my intent to continue this discussion about the PBGC," Miller concluded.

After the committee hearing, Congressman Miller noted in a  statement that "Earlier this week, the PBGC reported a $3.1 billion loss in equity investment in the first 11 months of fiscal year 2008. The September loss of $1.7 billion in stocks increased PBGC's total losses for the fiscal year to $4.8 billion."   He went on to note that "the dramatic loss comes at a time when the PBGC is beginning to implement a new controversial investment policy approved in February", and that the new policy "…would significantly shift PBGC assets from fixed-income securities, such as U.S. Treasuries, into more risky securities like real estate, emerging market debt, junk bonds and venture equities."

"With the current market turmoil, we have to ask the question whether it is wise to invest our nation's pension backstop in volatile equities," he said.

Following the hearing, PBGC Director Charles E.F. Millard issued the following statement:  

"The PBGC in stronger financial condition than it was a year ago. Our deficit is down about $3 billion from last year's $14 billion. Retirees who depend on us should not be concerned --the PBGC has sufficient funds to meet our benefit obligations for years into the future. To ensure our long-term ability to pay benefits, we have adopted a new investment policy that is diversified to mitigate risk. It gives us a better chance--3 times better-- to eliminate the deficit without a taxpayer bailout. The new policy will be very diverse, and our portfolio will ultimately include more in equity than it currently contains. However, the slow and deliberate approach we have taken to implementation has protected us from greater declines in this time of turmoil. "Our portfolio is down 6.5% over the last 12 months. We would rather be up, but in these trying times, retirees who depend upon us should feel secure knowing that our deficit is down over $3 billion this year. "