The Financial Health of the Pension Guaranty Benefit Corporation (PBGC)

Publication Date: March 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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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 PBGC receives no appropriated funds. The agency's costs are offset by the assets of the plans that the PBGC takes over and premiums paid by the sponsors of covered pension plans. The premiums are established by Congress. The PBGC's single-employer program posted an all-time high deficit of $23 billion in 2004; as of September 30, 2006, the deficit was $18 billion. The PBGC discloses an additional, off-balance sheet liability for reasonably possible terminations; as of September 30, 2006, it was $73 billion.

Although the PBGC's net position (measured as assets minus liabilities) improved $5.2 billion since 2004, it fell $31.0 billion from 2001 to 2004. Many factors have contributed to the PBGC's worsening financial condition. Primary among them was the termination of several large underfunded pension plans between 2002 and 2005 in the steel and airline industries. Plan terminations by airlines continue to threaten the PBGC's finances. Poor stock market returns (in 2001 and 2002) and falling interest rates also contributed to the PBGC's recent problems.

As the PBGC's condition worsened, Congress and the Bush Administration considered reforms to address the salient issues. On August 17, 2006, the President signed the Pension Protection Act as P.L. 109-280. It has been called the most comprehensive reform of the nation's pension laws since the enactment of ERISA. The law establishes new rules that strengthen funding requirements for most plans; however, it provides funding relief for plans sponsored by commercial airlines. It also includes reforms that affect cash balance plans, defined contribution plans, and other forms of deferred compensation.

Although the PBGC currently receives no appropriations, many expect that because it insures the pensions of 44 million Americans, its failure could require a taxpayer funded bailout. The Government Accountability Office (GAO) added the PBGC's single-employer insurance program to its list of high-risk areas in July of 2003. As of January 2007, it remains on GAO's list because of its high deficit and because the ultimate impact of recent reforms on the PBGC's finances is unclear.

This report focuses on the financial condition of the PBGC and the effects of the Pension Protection Act; it will be updated upon major developments affecting the PBGC's financial condition.