The problem is more than just the decline in asset values, and the application of now defunct 30-year Treasury bond rate, Pension Benefit Guaranty Corporation (PBGC) Assistant Executive Director Vince A. Snowbarger, told attendees at the annual American Society of Pension Actuaries Conference (ASPA) in Washington, D.C. “The funding is not keeping pace with the promises,” he said.
The agency has picked up the responsibility for about 120 plans over the past year, including Bethlehem Steel, LTV, and National Steel – which were only funded at levels of 48%, 50%, and 54%, according to PBGC calculations. Snowbarger noted that more than half (56%) of the claims absorbed by the agency since its inception in 1975 have been steel companies, although those programs represent just 3% of participants covered. Airline plans, another large claims category, represent 17% of the agencies claims since inception, but less than 2% of the participants (see Steel, Airlines Weigh on PBGC ) .
It’s not as though the companies with problem pensions are invisible. Snowbarger said 27 of the largest claims in the agency’s history had below investment grade debt ratings for over a decade before the PBGC stepped in – a decade during which they continued to make increasing pension commitments, according to Snowbarger. “Just because you’re in junk bond status doesn’t mean you can’t keep promising things,” he said.
Those promises have a cost, but global economic pressures have impacted companies’ ability to absorb them. “Once upon a time you could imbed the costs of these promises in the cost of goods sold, but no more,” he said. The nation’s defined benefit system is currently underfunded by about $350 billion, according to Snowbarger, who said that about $80 billion of that total has been classified as a “reasonably possible” claim by the agency. “Times have changed, but we’re not sure plan sponsors have changed with the times,” he said.
Snowbarger shared a number of charts that highlighted a dramatic reduction in contributions made to pension plans over the past 20 years. While in the early 1980s some $70 billion was contributed, contribution levels fell to just $26 billion on average, from 1995 to 1999. “The market was paying for the system,” he noted.
Since the beginning of the decade, real equity returns have been a negative 10.9%, according to Snowbarger. Based on estimates of a PBGC actuary, Snowbarger said that you would need an average return of more than 23% every year for the next seven years of the decade to average double digit returns for the decade. Of course, most pension plans are not 100% invested in equities, nor are most funding calculations predicated on double digit returns.
As for the future, Snowbarger noted that the Bush Administration's proposals (see Fisher Touts Bush Administration Pension Reform Measures ) are designed to:
- Improve the accuracy of the pension liability discount rate (to one that would take into account the age/dynamics of the specific plan, not a "one size fits all" approach where all plans use the same rate)
- Increase transparency of pension plan information - including more information to participants, and more information to the investing public about these commitments
- Strengthen safeguards against underfunding
- Comprehensive funding reforms.
In response to audience questions, Snowbarger said that the agency is considering risk based premiums, but cautioned that the PBGC's preference was to get more money into the system, not into the PBGC coffers. "Our major concern is underfunding…if you don't fix that, legislation is not likely to increase the premiums enough to deal with the problem," he said. And, he noted, companies most likely to be subjected to those type premiums would be least able to afford them - even if the premiums could be made large enough to deal with the problem.
Snowbarger said that the PBGC was looking at the possibility of raising funding targets so that employers could contribute more during good times. Acknowledging concerns that the Administration's yield curve alternative to the 30-year Treasury bond rate might make things more volatile, he noted, "I don't know how the system could be more volatile."
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