Can the Pension Benefit Guaranty Corporation Be Restored to Financial Health?

Publication Date: December 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Labor

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Abstract:

The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect the pensions of participants covered by most private sector, defined benefit pension plans. The primary source of revenues offsetting PBGC's claims is premiums paid by the sponsors of covered pension plans. These premiums are established by Congress. The PBGC receives no appropriated funds. The PBGC's single-employer program has posted growing deficits for the last three years. The deficit on September 30, 2004 was at an all-time high of $23 billion. Currently, the pension plans of major airlines present an enormous threat to the financial condition of the PBGC. Underfunded pension plans of sponsors with below-investment-gradebond ratings represented reasonably possible exposure of another $96.0 billion as of September 30, 2004 according to the PBGC.

An independent organization has projected that without reform, the PBGC's single-employer program will run out of cash in 2020 or 2021. Because of the risks to its long-term financial viability, the Government Accountability Office (GAO) has placed the PBGC single-employer program on its high-risk list of agencies with significant vulnerabilities to the federal government. PBGC failure could require a tax-payer funded bailout. Major systemic issues include the PBGC's premium structure, funding requirements for defined benefit pension plans and PBGC's access to a bankrupt company's assets.

Current PBGC premiums may be too low for the risks that PBGC underwrites. Furthermore, premiums do not vary based on the credit risk for the company, assetliability mismatch for the pension plan, participant demographics, or benefit design features such as whether or not the plan allows lump sum payouts. Sponsors that have made pension plan contributions in excess of the minimum required in the past may not be required to make contributions to the pension in the current year even when the pension plan is underfunded in the current year. Cyclical companies that wish to make higher contributions during profitable periods may find that maximum deductibility rules prevent them from making such contributions. Under current bankruptcy law, the PBGC cannot perfect a lien to force a company that has filed for bankruptcy to make minimum required pension plan contributions.

In 2003, the Bush administration made a proposal for reform to strengthen pension plan funding and the financial condition of the PBGC. Various bills with the goal of reforming the PBGC were proposed in the 108th Congress but none were enacted into law. The doubling of the PBGC deficit from fiscal 2003 to fiscal 2004, has heightened awareness about the PBGC deficit situation. Congressional leaders from both parties have announced their intention to move aggressively on legislative solutions in the 109th Congress.

This report will be updated upon major developments affecting the PBGC's financial condition.