According to the Pension Benefit Guaranty Corporation’s (PBGC) Annual Management Report , the agency ended fiscal year 2008 with its insurance program for single-employer pension plans still reporting a deficit of $10.7 billion, though that is a $2.4 billion improvement over last year’s $13.1 billion shortfall. Additionally, the deficit of the insurance program for multiemployer pension plans was cut in half to $473 million, a $482 million improvement from the $955 million deficit reported a year earlier, according to a press release.
Of course, the decline in the deficit in the single-employer program was primarily due to a $7.6 billion actuarial credit from a favorable change in interest factors, according to the PBGC, as well as:
- $1.4 billion in premium income,
- credits of $826 million from completed and probable terminations, and
- $649 million in favorable actuarial adjustments.
In its annual report to Congress, the PBGC noted that those amounts were offset by investment losses of $4.2 billion and a $3.4 billion actuarial charge to passage of time. Total return on invested funds for the fiscal year, which ended September 30, was -6.5%.
“The PBGC’s lower deficit is good news, although it is important to remember that the deficit number is only a snapshot of where we stood on September 30,” said Director Charles E.F. Millard. “Successful negotiations with companies in bankruptcy protected workers’ pensions and sliced hundreds of millions of dollars in liabilities off our books. Favorable interest rate changes reduced liabilities, and our careful stewardship of the PBGC’s investments limited losses to 6.5 percent of assets.
The PBGC said that liability valuation interest factors increased by 135 basis points to 6.66% at September 30, 2008, from 5.31% at September 30, 2007. "This increase in PBGC's interest factors resulted in a reduction to actuarial charges, due to change in interest rates, of $7.56 billion that more than offsets the actuarial charges for passage of time of $3.40 billion," the agency noted. That favorable impact due to changes in interest rates was "strongly influenced by the unprecedented increase in highly rated long-term corporate bond yields that occurred as a result of credit market volatility at yearend" - movements that caused what was termed a "significant drop" in PBGC's Present Value of Future Benefits (PVFB) at September 30, 2008. However, the report to Congress noted that that trend "could easily reverse itself in the future if interest factors decline."
In releasing the information, Millard did note that "Although the current turbulence in our economy will mean a challenging environment in 2009, the PBGC has the resources to meet its commitments to America's retirees for many years to come."
As of September 30, the single-employer program reported assets of $61.6 billion and liabilities of $72.3 billion. The Employee Retirement Income Security Act of 1974 (ERISA), which established the PBGC, explicitly says that the United States government does not stand behind these liabilities.
The single-employer program posted premium income of about $1.40 billion in 2008, a slight decrease from $1.48 billion in 2007. In 2008, no new large pension plans were classified as probable losses on the PBGC balance sheet, though during the year, the single-employer program took in 67 newly terminated pension plans, which had an average funded ratio of approximately 59% and resulted in an aggregate net loss to PBGC of $271 million. The program is directly responsible for the benefits of about 1.2 million workers and retirees in 3,850 pension plans. Overall benefit payments remained relatively flat at $4.29 billion this year from $4.27 billion in 2007. The program insures the pensions of 33.8 million Americans in about 27,900 ongoing plans sponsored by private-sector employers.
The Annual Management Report also shows the PBGC's potential exposure to future pension losses from financially weak companies decreased to $47 billion, compared to $66 billion in 2007.
In the report, the PBGC noted that it had, during fiscal 2008, completed an investment program and policy review. "As a result, PBGC adopted a new investment policy in February 2008 that utilizes a more diversified investment structure. The new investment policy allocates 45 percent to equities, 45 percent to fixed income, 5 percent to real estate, and 5 percent to private equity (see Millard Defends PBGC Investment Policy Change ). PBGC also recently appointed a new Chief Investment Officer ( PBGC Turns to MD's Greenberg as CIO ).
Looking ahead to next year's agenda, the PBGC said it expects to publish proposed and/or final rules implementing the expanded missing participants program and PPA changes to terminating cash balance plans and PBGC's guarantee of shutdown benefits.
As of September 30, 2008, the single-employer and multiemployer programs reported deficits of $10.7 billion and $473 million, respectively. "Notwithstanding these deficits, the Corporation has $63 billion in assets and will be able to meet its obligations for a number of years," the PBGC said in the report - but cautioned that "neither program at present has the resources to fully satisfy PBGC's obligations in the long run."