PBGC Exec: Pension Insurer Hit by 'Perfect Storm'

October 29, 2002 (PLANSPONSOR.com) - Being slammed by taking over pension plans from many defunct steel companies, including the 82,000-participant LTV Steel plan, has taken a sizable bite from the federal pension insurer's fiscal surplus.

That’s was the sobering report by Steven Kandarian, executive director of the Pension Benefit Guaranty Corporation (PBGC), who dubbed his agency’s recent times “a perfect storm.” Kandarian made his remarks this week in a Washington speech, Washington-based legal publisher BNA reported.

The elements of “the perfect storm,” according to the PBGC executive: a large number of underfunded pension plans that terminated, a falling stock market slashing still more from the terminated plans’ asset value, and low interest rates.

The agency’s $10-billion surplus at the end of the FY 2000, dropped to $8 billion at YE 2001, Kandarian said. The trend is sure to continue through FY 2002 with increasing numbers of terminated plans and participants, he said.

Steel Industry’s Impact

Kandarian made it clear in his remarks how significant the impact of  the beleaguered steel industry has had on the PBGC . He said 38% of all claims the agency has processed since its 1974 inception have dealt with the steel industry, which, as a whole, has a $9-billion underfunding problem, according to the BNA report.

The  LTV plan  terminated March 31, which Kandarian said was underfunded by $2.2 billion, represented the largest underfunded plan with the largest participant influx at one time in the history of the agency, the BNA reported.

“LTV was a major hit to the [pension] system in terms of workload and dollars,” Kandarian said, according to the BNA report.  

Shutdown Benefits

Additionally, there is another $4 billion in related shutdown benefits, Kandarian said. Shutdown benefits allow workers as young as age 43 to collect the same benefits they otherwise would have had to wait until age 62 to collect

Shutdown benefits occur when a company shuts down all at once, Kandarian said. These are “unfunded” benefits, not underfunded benefits. The company has not paid premiums to the PBGC for these unfunded benefits.

The company does not fund these benefits until after the shutdown of the company actually occurs, at which time the agency may have to assume the liability because the company cannot, Kandarian said, the BNA reported. This is the case with the large steel companies, Kandarian said.

In addition to the steel industry,  the airline industry  has about $14 billion in underfunded plans, Kandarian said.

Another concern is underfunded plans promising increased benefits without addressing current underfunding, Kandarian said

Kandarian told the Washington audience that he hopes to introduce technology that would include the ability to transact business (forms and premium payments) with the agency electronically. Also under testing are personal accounts for plan participants and on-line self-service accounts for plan administrators.

Created by ERISA, the PBGC guarantees pension payments for employees of private-sector companies with ailing pension plans.PBGC is funded from insurance premiums paid by covered companies and investment earnings.