PBGC Future Depends on What Happens to DB Plans

May 20, 2009 (PLANSPONSOR.com) - "The major future issue for PBGC is what happens to defined benefit plans."

That was a key point in the testimony of Dallas Salisbury, President and CEO of the Employee Benefit Research Institute, before the Senate Special Committee on Aging on Wednesday afternoon (see Senate Committee Weighs in on PBGC ). Opening the hearing shortly after 2:00 p.m., Committee Chairman Herb Kohl (D-Wisconsin) noted that with the current state of the economy, the viability of the Pension Benefit Guaranty Corporation (PBGC) is more urgent now than ever.

Kohl noted that the Government Accountability Office (GAO) for years has indicated that the agency does not have the time or resources to perform its necessary operations (see PBGC Programs Designated High-risk by GAO ), PBGC Acting Director Vince Snowbarger said the agency posted a $33.5-billion deficit for the first half of fiscal year 2009 (see PBGC Funding Gap Ballooning as Plan Terminations Increase ), and Congress is now investigating possible impropriety of actions by former PBGC head Charles E.F. Millard during a recent shift in fund allocations (see Former PBGC Head Draws Scrutiny ).

Kohl said that soon he will be introducing legislation to improve agency governance, oversight, and structure. “We must get the agency back on track or we will be faced with absorbing its obligations,” he commented.

After Charles E.F. Millard, former PBGC director, declined to answer any and all questions from the committee, invoking his 5th amendment rights, and was excused from meeting (see Millard Invokes Fifth Amendment Rights at Senate Hearing ), Kohl turned the hearing over to Salisbury.

"As long as an employer or group of employers maintains the plan until it is pays its last benefit, PBGC is fine," said Salisbury, in his testimony to the Senate Special Committee on Aging. However, he noted that EBRI has seen a trend in the last few years of even healthy plans being terminated or frozen as sponsors move to defined contribution offerings.

Salisbury admitted that the risk to the agency is underfunded terminations due to business failures or reorganizations, and that risk is greater in the current economic crisis, especially due to a potential auto industry net exposure of $42 billion were all plans to end up with the PBGC (see Outgoing Pension Insurer Director Cautions about Carmaker Shortfalls ).

"The longer the economic recession continues, the higher unemployment goes, and the longer the Federal Reserve holds down interest rates, the worse the situation for defined benefit plans and the PBGC will become," Salisbury contended. He pointed out that low interest rates cause pension liabilities to rise, and that in turn requires much larger pension contributions when rates are smoothed over three to five years rather than 20, 30 or 40.

He said provisions in the Pension Protection Act of 2006, combined with current interest rate policy, will likely combine to cause harm to the defined benefit system and the PBGC in the years immediately ahead. The unexpected downturn in the economy prompted lawmakers to provide relief the same year new funding rules were to go into effect (see IRS Issues Interim Rules for Pension Funding Relief and IRS Issues Guidance on Funding Relief ).

Salisbury noted that in the past the agency has gone to Congress to have employer premiums increased to help mitigate potential exposure, and it still can do so, but that could lead to a bad result for the DB system as sponsors grapple with the increasing costs of benefits offerings.

Salisbury 's testimony is here .

More information and testimony delivered at the hearing is available  here .