The PBGC disclosed last week that its deficit hit a record $33.5 billion at the end of its 2009 fiscal first half on March 31, compared with $11.2 billion at the close of fiscal 2008.
The deficit eclipses the prior highest deficit of $23.5 billion from 2004. Losses from completed and probable terminations, lower interest rates used to value the PBGC liabilities, and investment losses were key factors contributing to the deficit.
And the worst may be yet to come.
According to PBGC estimates, auto sector pension plans alone are underfunded by about $77 billion, $42 billion of which would be guaranteed by the PBGC if those plans failed.
But it isn’t just ailing auto companies and their massively underfunded pension plans that pose a threat to the PBGC, whose insurance programs are funded by premiums paid by employers with defined-benefit plans.
At a Senate Aging Committee hearing last week, an official of the Government Accountability Office said large pension plan terminations from employers in a variety of industries could hit the PBGC.
“While the events surrounding the automakers and their plans are clearly an area of concern for the PBGC, the recession has likely affected many industry sectors,” said Barbara D. Bovbjerg, GAO director of education, workforce and income security.
While past big claims were concentrated in industries such as steel and airlines, “there is cause for concern that future claims will come from a much broader array of industries.”
The PBGC “will be challenged as never before” due to a declining economy, Bovbjerg said.
Taxpayer bailout a possibility
Some legislators and others warn that a taxpayer-funded bailout is a potential scenario.
“We must get the PBGC back on track” or face a bailout, said Senate Aging Committee Chairman Herb Kohl, D-Wisconsin.
Bovbjerg noted that if the PBGC’s accumulated deficit continues to rise and liquidity declines, pressure could build for the federal government to provide the agency with financial assistance to prevent benefit reductions or “unsustainable increases” in PBGC premiums paid by employers with ongoing plans.
The current base annual premium of $34 per plan participant is indexed to increases in national average wages. Sponsors of underfunded plans pay an additional premium.
At the moment, there is little interest in Congress in raising employer premiums, which legislators last significantly increased in 2005 as part of a broader measure, Washington observers say.
Lawmakers understand that a premium increase would be “counterproductive” as it would accelerate the move of employers away from defined-benefit plans, said James Klein, president of the American Benefits Council in Washington.
It isn’t just the big liabilities that the PBGC takes on when companies fold underfunded pension plans that pose a threat. The PBGC also faces declining premiums as more companies freeze their plans and the number of participants declines.
Yet another threat to the agency’s premium income, which in fiscal 2008 was more than $1.4 billion, is that when interest rates rise, employers with fully funded plans might find it financially attractive to terminate the plans and purchase annuities from commercial insurers that would then provide the benefits.
The issue in the long term is whether other defined-benefit plans will exist from which the PBGC would collect premium income needed to pay benefits to participants in plans the agency has taken over, said Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington.
“The real problem is when the [PBGC’s] assets run out,” said Salisbury, who also testified at the hearing.
Others, though, say worries about the PBGC’s finances are overstated.
The current size of the PBGC’s deficit is not a cause for alarm, said Mark Warshawsky, former assistant secretary of tax policy at the Treasury Department and now director of retirement research at Watson Wyatt Worldwide in Arlington, Virginia.
Interest rates are cyclical, and if rates shoot up from their current low levels, the size of the PBGC’s deficit would decline significantly, he said.
The deficit figure is just “a snapshot” in time and can give a skewed perspective of the agency’s financial condition, Klein said.
In addition, the PBGC’s deficit includes losses from plan terminations that the PBGC considers “probable,” and that is based on the PBGC’s judgment, Warshawsky said.
From 1987 to 2007, 80 percent of pension plans the PBGC initially classified as probable eventually were taken over by the agency.