PBGC Estimates Costly Impact of Pension Reform

July 25, 2006 (PLANSPONSOR.com) - A recent analysis from the Pension Benefit Guaranty Corporation (PBGC) found that pension reform legislation expected to be released at any time could increase the financial burden of the federal pension insurer.

The PBGC projections imply the agency would have to make more pension payments than required under current law for companies not able to do so themselves, according to a Wall Street Journal report. PBGC projections also show that companies would have to contribute slightly less to their pension plans.

In its estimates prepared in late June, the PBGC says, under current law, the agency will absorb an estimated $12.8 billion in pension obligations, whereas the proposals that Congress is considering would increase the agency’s obligations from $14.9 billion to $15.2 billion over the decade.

Additionally, the projections indicate employers would contribute about $1.24 trillion to their plans from 2007 through 2016 under current law, while three variations on the new legislation would result in contributions of $1.21 trillion to $1.23 trillion, according to the WSJ.

In its report, the agency cautions that its analysis exaggerates the effectiveness of the legislative proposals because it did not take into consideration proposals giving airlines, and possibly companies in other industries, breaks on funding rules and other technical changes that would reduce contributions.

Some congressional staff said the PBGC’s analysis is flawed, partly because it overestimates what companies have to contribute under current rules, the news report said. The agency used interest rates on 30-year Treasury bonds to estimate corporate liabilities, while an interim measure has allowed companies to use a higher interest rate and make lower contributions.

The new legislation will link a company’s funding requirements to when its obligations will be due and not to a standard interest rate.

Supporters of the reform say a change of the minimum required contributions from employers to their pension plans will keep pensions better funded and make it less likely the PBGC will have to assume their obligations.