PBGC Head Forecasts 'Significantly Increased' Shortfall

October 7, 2004 (PLANSPONSOR.com) - The Pension Benefit Guaranty Corporation (PBGC)'s deficit should be "significantly increased" from its record $11.2 billion 2003 shortfall, the agency's director said in Congressional testimony.

>The dire prediction came from Bradley Belt, PBGC executive director, during comments to the US Senate Commerce Committee, which conducted hearings into the effect of pension policy and bankruptcy law on the airline industry.

>Specifically mentioning the airline sector’s ongoing pension woes – notably United , US Airways and Delta Air Lines – Belt told lawmakers that the problems were a symptom of a larger structural flaw. He said the total exposure of plan participants and the agency’s pension insurance program for the airline industry was $31 billion on a termination basis including $6.4 billion, which is guaranteed by the PBGC. Both US Airways and United have vowed not to make pension payments while reorganizing under US Bankruptcy Court protection.

“Simply put,” Belt said, “companies should be held accountable to make good on the pension promises they have made to their workers and retirees. The consequences of not honoring these commitments are unacceptable – the retirement security of millions of current and future retirees is at risk.”

>Belt asserted that the structural flaws included not demanding more from companies with more seriously ailing pension programs. “Unfortunately, the pension insurance program lacks basic checks and balances,” he testified. “There are no risk-based underwriting standards. Plan sponsors face no penalties regardless of the risk they impose on the system. And there is relatively little consequences to acting irresponsibly and not funding pension promises. As a result, there has been a tremendous amount of cost-shifting from financially troubled companies with underfunded plans to healthy companies with well-funded plans.”

>Belt outlined a three-pronged reform plan first proposed last year, which he said would ease the system’s pension pressure:

  • Improve the accuracy of the pension liability measurement to reflect the time structure of each pension plan’s benefit payments by measuring a plan’s liabilities using a yield curve of highly rated corporate bonds to calculate the present value of those future payments.
  • Require better exposure to workers, retirees, investors and creditors about the funded status of pension plans, which will improve incentives for adequate funding.
  • Require financially troubled companies with highly underfunded plans to immediately fund or secure backing for additional benefits, benefit improvements, and lump sum payments.

Tottering steel industry pension plans have also had an explosive impact on the PBGC’s coffers in recent years.