PBGC Board Cautions Senate on DRC Action

November 24, 2003 (PLANSPONSOR.com) - Last week the US House of Representatives passed a bill that would give major US commercial airlines a two-year "pass" on much of their required pension contributions - and the Bush Administration doesn't think that is a good idea.

>In a letter to Senate leaders last week, the Pension Benefit Guaranty Corporation (PBGC) board acknowledged the demands placed on plan sponsor revenues by pension funding requirements, particularly during periods of slow economic growth.   However, granting a “holiday” from the deficit reduction contribution (DRC) requirements “would mean a significant further reduction in the resources available to meet the promises made to existing and future retirees,” according to the PBGC board, which includes Secretary of Labor Elaine l. Chao, Treasury Secretary John Snow, and Commerce Secretary Donald Evans.

>Indeed, a three-year exemption from the DRC rules, a strengthened set of funding rules enacted in 1987 to better shield workers and the nation’s pension insurance program from suffering large losses when underfunded plans terminate, would allow companies sponsoring these plans to skip $30 billion in pension contributions from 2004 through 2006, according to PBGC estimates.

“Giving a special break to weak companies with the worst-funded plans is a dangerous gamble,” PBGC Executive Director Steven A. Kandarian said earlier this month. “The risk is that these plans will terminate down the road even more underfunded than they are today.”  

Better Options

>In their letter, the PBGC board notes that the Administration has put forward a proposal for changing the statutory method of pension discounting – an approach similar to that in H.R. 3108 and the Senate Finance Committee’s NESTEG bill – that would provide some $30 billion of funding relief to employers in the near future.  The House of Representatives passed a bill granting a two-year exemption relief from the accelerated contributions under the DRC (see  House Approves Pension Relief Bill ).

The DRC requires plan sponsors to pay off their unfunded liabilities over three to seven years – a faster schedule designed to get cash into pension plans before companies fail and transfer their liabilities to the PBGC.   In the absence of the DRC, companies would pay for promised benefits under the weaker funding rules set in 1974, rules which allow companies to fund benefit increases over 30 years.

>The PBGC's concerns hardly seem unfounded, given the industry's track record.   Half of the 10 largest claims against the nation's private pension plan insurer have arisen in the past three years, and only the nation's steel industry has placed a larger burden on the pension insurance system than airlines (see  Steel, Airlines Weigh on PBGC ).   This past summer, the General Accounting Office (GAO), recognizing the potential impact of agency's swelling deficit, designated the PBGC's status "high risk" (see  GAO Designates PBGC 'High Risk' ).   

>The PBGC estimates that overall pension underfunding in plans sponsored by financially weak companies exceeded $80 billion as of Dec. 31, 2002. The DRC provision would allow companies representing nearly $60 billion of this "at risk" liability to stop making accelerated pension contributions. The average funding ratio of these plans on a termination basis is less than 60% (see  PBGC Warns of Deficit Reduction Contribution Suspension Impacts ).

Steel "Dump"

>The agency has picked up the responsibility for about 120 plans over the past year, including Bethlehem Steel, LTV, and National Steel - which were only funded at levels of 48%, 50%, and 54%, according to PBGC calculations (see  PBGC Says Pension Promises Outpace Funding ).  

>Legislation recently approved by the Senate Finance Committee would give the worst-funded pension plans a three-year exemption from the deficit reduction contribution (DRC) (see  Finance Committee Gives Grassley Pension Bill the Go-Ahead ).   Many of the companies that would benefit from the exemption pose a heightened risk of defaulting on their pension promises, according to the PBGC.

>The PBGC also examined underfunded plans that have terminated since 2000 to see how many would have been exempt from the DRC. Nearly 90 % of these plans, which failed with insufficient assets to pay all promised benefits, would have had their contributions waived under the Senate provision - including the largest claim in the PBGC's history, Bethlehem Steel at $3.9 billion.

The PBGC notes that when plans terminate, participants and retirees can lose out on benefits because of legal limits imposed on PBGC's benefit guarantees (see  PBGC Bumps Up 2004 Benefit Limits ).   Financially healthy companies with better-funded pension plans could also pay a price, according to the PBGC.   As of August 31, the PBGC's single-employer insurance program had a deficit of $8.8 billion. "If companies do not pay for their benefit obligations, someone else must," Kandarian said. "In this case, other employers would face higher costs supporting the PBGC despite having adequately funded their own plans."