The PBGC reported a $22.8 million deficit as of September 30, 2005 (See PBGC Financial Status Still Dire).
Calculation of the Financial Statement
The PBGC said its financial statement is prepared in accordance with Generally Accepted Accounting Principles (GAAP). The financial condition of the agency is determined by comparing its assets with liabilities. The agency said its assets consist primarily of accumulated premiums paid by covered plans, that are invested in Treasury securities, and plan assets that PBGC has taken over when it becomes trustee of terminated underfunded plans. PBGC uses group annuity prices to value its liabilities.
The deficit includes losses incurred from plans that have already terminated and estimated losses incurred from “probable” terminations. According to the Q & A, the GAAP and Financial Accounting Standards Board Statement No.5 require the PBGC to include expected losses if they are likely to occur and can be estimated. The PBGC said that 95% of the “probable” terminations it had included in its financial statement since 1987 actually occurred.
Some, including the American Benefits Council, have said that the PBGC’s deficit is actually overstated due to the way it is calculated (See Report Says PBGC’s Crisis is Overblown ). In its report, the ABC claims the high deficit number is a result of using an unreasonably low rate of interest for the PBGC’s calculation. The ABC says the interest rate the PBGC used to make its estimate (4.8%) is below the rate typically used by plans to calculate their funded status and points out that it is also below the “yield-curve” rate proposed by the Bush Administration in its pension reform bill.
The PBGC concedes that valuing the liabilities using a “spot” composite corporate bond rate would produce a deficit figure of around $19 billion instead, but says there would still have been a dramatic swing in the PBGC’s financial position from a surplus to a very large deficit over the last four years, and believes the discount rate reflected in annuity market pricing is the one that the PBGC believes is most applicable.
The insurer said in the Q & A that its deficit is not a measure of the program’s long-term economic cost.
The PBGC estimates that, measured on a termination basis, total underfunding in the single-employer defined benefit plans it insures exceeded $450 billion as of September 30, 2005, a greater amount than it shows on its balance sheet or includes in its deficit. Of the $450 million, $108 million of the underfunding is in plans sponsored by companies whose bonds are rated below investment grade or who met other criteria for being likely to default on debt obligations.
The PBGC’s experience shows that plans of financially weak employers have been a source of substantial claims for the agency. Moreover, PBGC’s termination-basis measure also takes into account the fact that when a plan of a financially weak company terminates, more individuals tend to retire early with subsidized benefits. These early retirements often substantially increase plan liabilities and, consequently, plan underfunding.
As examples, the agency said Bethlehem Steel reported that its plan was 84% funded on an ongoing basis, but the plan turned out to be only 45% funded on a termination basis, with a total shortfall of $4.3 billion and US Airways’ pilots’ plan was 94% funded on an ongoing basis, but the plan was only 33% funded on a termination basis, with a $2.5 billion shortfall.
Consequences of the PBGC’s Financial Position
The concern, according to the Q & A is that when underfunded pension plans terminate, workers and retirees, companies that have acted responsibly in honoring their pension promises, and, potentially, US taxpayers are hurt.
Of the $18 billion in underfunding recorded for the four largest terminations in PBGC history, about two-thirds was covered by the insurer. The other one-third represents the loss to plan participants. The agency said this is not the norm, but some terminations result in a higher ratio and others in a lower one.
Companies that have acted responsibly are hurt when the premiums they pay for their pension plan insurance is used to fund the liabilities of plans that have terminated. In addition, the premiums needed to pay for plan defaults might become too high for the defined benefit plan sponsors in the system, raising the prospect of either the need for general taxpayer assistance or a greater loss of benefits for insured participants.
The Q & A can be read here .