PBGC Bottom Line Buffeted by "Perfect Storm"

January 27, 2003 (PLANSPONSOR.com) - Shrinking market values and a growing number of pension fund failures have taken their toll on the nation's private pension insurer.

The Pension Benefit Guaranty Corporation (PBGC), which insures the pensions of some 44 million Americans, is expected this week to announce a deficit of $1 billion to $2 billion, according to the New York Times.   The agency had a surplus of some $8 billion a year ago (see  Fund Losses, Plan ‘Gains’ Add Up for PBGC) , but has been picking up a growing number of troubled pension plans, particularly in the steel industry.

Randy Clerihue, director of communications at PBGC, told Reuters that PBGC officials had not been the source for the NYT story. “I can’t confirm or deny it,” he said, according to the report.

The Bottom Line

According to the 2001 PBGC Data and Trends, the agency’s single-employer program was in deficit until 1996, with the highest reported deficit $2.9 billion in 1993. As with many of the nation’s private pension plans, that deficit turned into a surplus, lifted by a shift in how the agency’s premiums were determined as well as the surging stock market.   The PBGC’s surplus reached a historic high of $9.7 billion in 2000, but, along with the private pension system, has come under pressure since then by trends in interest rates, asset values, and a growing number of troubled pension plans in the private sector.   In 2001, PBGC paid out more than $1 billion in monthly pension and lump sum benefit payments to retired plan participants or their beneficiaries (see  PBGC Opens up 2001 Data Book ).


Not that the looming shortfall has been unanticipated.   Last fall Steven Kandarian, executive director of the PBGC, dubbed the coming crisis a “a perfect storm”:   a large number of underfunded pension plans that terminated, a slumping stock market which erodes the market value of pension plan assets, and record low interest rates that inflate the projected value of future liabilities (see  PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’ ).  

More recently the agency has adopted what appears to be a more aggressive stance in taking over responsibility for pension programs in troubled industries.   Recent moves to step in with the programs of National Steel (see  Union, National Steel Question PBGC Intervention ) and Bethlehem Steel (see  PBGC Puts a Wrench in Bethlehem, International Steel Merger ) have been challenged by both unions and the sponsoring employer.    

Steel Deals

Traditionally, the generous benefits of the steel and airline industries have been most problematic for the PBGC – and in recent months, the troubles of both have reemerged with a vengeance.   A recent report from Fitch Ratings projects an aggregate level of pension plan underfunding among the country’s seven largest air carriers at $18.8 billion as of December 31, 2002 (see  Fitch: Airlines’ Pension Picture ‘Most Dire’ ).   The steel industry has struggled for the past several years (See  PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’ ), and the auto industry, which has recovered from large pension deficits of its own a decade ago, is now showing renewed signs of trouble (see  Fitch: Auto Sector Pension Gap $30B by YE 2002 ).

This confluence of events is truly unique in the history of ERISA. Most notoriously, we are in the third year of a sustained downturn in the equity markets, which the US has not endured since World War II. In fact, the last back-to-back downturn was in 1973/1974, just prior to the advent of the Employee Retirement Income Security Act (ERISA) (see  Storm Warnings ).

Future Tense?

Those deficits – or surpluses – have never been an issue for the American taxpayer.   Since its inception the PBGC has been wholly funded by the pension system itself.   Companies currently pay $19 per person covered each year – more if the plan is underfunded.  

One option to shore up the situation would be to increase premiums collected by the agency.   However, lifting the rates for troubled plans is likely to exacerbate the current rate of pension termination, which could be bad news both for workers and for the PBGC itself – and lifting the rate for plans that aren’t currently troubled could trigger a reconsideration of the programs.

Of course, even if the current situation doesn’t abate soon, the PBGC could simply return to operating at a deficit, as it has for most of its existence.   Its obligations are mostly long-term, after all, and could be ameliorated by either a rise in interest rates or the stock market – or both.  

But with the retirements of the Baby Boomers looming larger every day, it’s also clear that even long-term obligations eventually come due.