PBGC: Deficit Continues to Grow

June 27, 2003 (PLANSPONSOR.com) - The steady stream of private sector defined benefit pension plans taken over by the federal pension insurer continues to push the agency further into the red, officials announced.

According to Vince Snowbarger, assistant executive director of the Pension Benefit Guaranty Corporation (PBGC), the agency’s deficit grew by $1.8 billion between the end of its 2002 fiscal year and March 31, 2003 to $5.4 billion, Washington-based legal publisher BNA reported.   Snowbarger released the new figure as part of a presentation to the US Department of Labor’s ERISA Advisory Council Working Group on Defined Benefit Funding.

The latest figure follows a PBGC announcement in January that it had suffered an $11.37-billion loss in FY 2002, swinging from a $7.73 billion surplus at the end of FY 2001 to a $3.64 billion deficit for FY 2002. Executive Director Steven Kandarian listed the continuing crisis in pension funding in the steel and airline sectors in particular as a major cause of the sobering fiscal report (See    PBGC Reports Record Loss ).

Snowbarger’s presentation to the working group also showed that the agency’s single employer premium income paid by companies whose pension plans the PBGC insures, has been relatively flat over the last several years and that the 2002 level is the lowest since 1992.

Also the funding picture for the private sector DB space is still vexingly problematic, the PBGC official said in his presentation. Total underfunding for PBGC-insured single employer plans is projected to be $325 billion for 2002, Snowbarger said.

Showing the top 10 firms presenting claims for fiscal 1975 to the present reflects a weakness in the funding rules, Snowbarger argued. Bethlehem Steel, with claims of $3.9 billion (largest of the 10) and 95,000 covered participants, reflected a funded ratio of 48%. Sharon Steel, with claims of $0.3 billion (smallest of the ten) and 6,900 covered participants, reflected a funded ratio of 21%. Snowbarger also pointed out that over 90% of company debt ratings for large claims are below investment grade status.

Racing to Avoid More Liabilities

“Shutdown benefits are not paid for,” Snowbarger said. Shutdown benefits are additional benefits triggered by a shutdown of a plant or permanent layoff of workers primarily in the steel, auto, and tire and rubber industries, he said.   The PBGC guarantees shutdown benefits, up to statutory limits, if the shutdown occurs before the plan termination, but not if the shutdown takes place after, Snowbarger said.

Shutdown benefits can be a significant drain to the system, Snowbarger said. Referring to LTV Steel, he said the PBGC incurred $200 million in additional liabilities because termination of the plan occurred after the shutdown.

As a result, PBGC has “seen the handwriting on the wall” and now moves to terminate plans before a shutdown occurs, Snowbarger said. “This sets up a race to the court house,” he said. The agency finds this approach “distasteful” and does not like to take “precipitous action to avoid liabilities,” Snowbarger told the working group.

Finally, Snowbarger, listed the following issues PBGC is currently examining:

  • appropriate measures of assets and liabilities
  • transparency of pension information
  • responsible, well-funded benefit promises
  • financial integrity of the (pension) insurance system.