According to the Pension Benefit Guaranty Corporation (PBGC), which released its FY 2003 annual report Thursday, the two biggest factors in the loss were $5.4 billion from completed and probable pension plan terminations, and $4.3 billion from declining interest rates. The latest deficit is more than three times the PBGC’s previous showing – FY 2002’s $3.6 billion deficit (See PBGC Reports Record Loss ).
Despite the sizable deficit, the agency insisted that its current assets “assure the Corporation’s ability to meet its obligations for a number of years.” Overall, including the assets of terminated plans for which PBGC took responsibility during FY 2003, the single-employer program had $34 billion in assets to cover $45.3 billion in liabilities, compared to $25.4 billion in assets to cover $29 billion in liabilities for FY 2002. The PBGC’s single-employer program insures the pensions of 34.5 million Americans in 29,500 plans.
Partially offsetting the single-employer program’s losses were premium income of $948 million and investment income of $3.3 billion.
But the current fiscal danger signs are only the half of it, according to the agency, which steps in to assume pension obligations for bankrupt or ailing companies. The PBGC said it also faces $85.5 billion, in “reasonably possible exposure” – an estimate of the amount of unfunded vested benefits in pension plans sponsored by financially weak employers. The FY 2003 “reasonably possible exposure” figure was nearly two and a half times higher than the previous year’s estimate of $35.4 billion.
Not surprisingly, airlines ($23.4 billion) and primary metals & fabricated metal products ($10.2 billion) account for nearly 40% of the “reasonably possible exposure” total, the agency said. “PBGC continues to face significant exposure from troubled companies with underfunded pension plans, especially in the air transportation and steel sectors, the termination of which could produce substantial additional losses,” the agency said in its annual report.
The PBGC has previously blamed the continuing stream of plans it has had to terminate from the steel and airline industries for its continuing fiscal woes (See Steel, Airlines Weigh on PBGC ). According to Thursday’s announcement, its single largest plan – Bethlehem Steel – came in during the year with 95,000 participants and a $3.6 billion loss – the largest loss from a single company in PBGC history.
“The continued erosion of PBGC’s financial condition underscores the need for comprehensive reforms to put pension plans on a path to better funding,” said Executive Director Steven Kandarian, who previously announced his intention to step down from his post to return to the private sector (See PBGC Head Steps Down to Spend More Family Time ). “While the PBGC has sufficient assets to pay benefits to workers and retirees for a number of years, the growing gap between our assets and liabilities puts at risk the agency’s ability to continue to protect pensions in the future.”
Meanwhile, the PBGC’s multiemployer plan program suffered a $419 million fiscal year 2003 loss, resulting in fiscal year-end deficit of $261 million. This was the program’s first deficit in more than two decades and its largest deficit ever. The multiemployer program covers 9.7 million participants in more than 1,600 plans.
According to the agency’s announcement Thursday, the sharp reversal in the program’s financial condition is due largely to a decline in interest rates and the recording of new probable losses for plans that are projected to become insolvent and require financial assistance from PBGC to pay benefits. The multiemployer program has $1 billion in assets and receives $25 million a year in premium income. PBGC estimates that total underfunding in multiemployer plans is roughly $100 billion.
“This underfunding prompts an additional concern for the multiemployer program because the underfunding is concentrated in mature, often declining industries,” Kandarian said in the announcement. “Given the limited size of the multiemployer program, the failure of a large, highly underfunded plan could overwhelm the program’s financial capacity.”
Details in the annual report included:
- The PBGC became trustee of 152 pension plans covering 206,000 people during FY 2003, up from 144 plans and 187,000 participants the year before. This was the largest one-year increase in the total number of people owed guaranteed benefits by the agency.
- The total number of participants owed or receiving PBGC guaranteed benefits, including participants in multiemployer plans receiving financial assistance, rose to 934,000 from 783,000.
- The PBGC paid a record $2.5 billion in benefits, nearly $1 billion more than in 2002.
- Premium income rose to $973 million from $812 million the year before.
- PBGC’s total return on invested assets was a positive 10.3% in 2003 compared with 2.1 % in 2002.
Lawmaker: System “Needs Reform”
After the PBGC annual report release, one prominent lawmaker endorsed Kandarian’s call for program changes to deal with the agency’s difficult financial picture. “The alarming trend of underfunded defined benefit plans is clearly increasing the pressure on the PBGC, threatening its ability to protect and insure worker pension benefits and putting taxpayers’ interests in real jeopardy,” said US House Education & the Workforce Committee Chairman Representative John Boehner (R-Ohio). “The systemic pension underfunding problems that have produced this startling PBGC deficit show that the defined benefit system needs reform.”
However, an industry group official cautioned against overreacting to the latest PBGC numbers. “We should no more panic over the news of a large PBGC deficit than we should rejoice when the agency reports a surplus,” said American Benefits Council President James Klein in a statement. “The obligations of the PBGC will be owed to retirees over several decades, during which time the PBGC is likely to experience numerous surpluses and deficits.”
Klein continued, “The best way to stabilize the PBGC’s finances is by having a viable defined benefit system in this country. Because our pension system has a bad cold, the PBGC sneezed. So instead of concentrating on the symptom, we must cure the illness.”
A full copy of the annual report is available at http://www.pbgc.gov/publications/annrpt/03annrpt.pdf .