Actuaries confirm PBGC deficit calculation

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Joshua Gotbaum

The Pension Benefit Guaranty Corp.'s record $29.1 billion deficit in its single-employer program is based on reasonable assumptions, according to an analysis by the American Academy of Actuaries.

The actuary group's pension committee found that the 3.28% discount rate used by the PBGC to estimate its obligations is at “a reasonable level between the higher corporate bond yields used by private pension plans and lower Treasury securities rates considered to be 'risk-free,'” according to the analysis. The 3.28% discount rate was based on currently available annuity rates to estimate liabilities of $112 billion, as of Sept. 30, 2012, when the market value of PBGC assets was $83 billion.

The PBGC investment portfolio, which has a 70% fixed-income allocation, returned 12.6% in fiscal 2012, with $4.8 billion in gains from fixed income and $4 billion from equities.

The agency has been criticized by some sponsors of defined benefit plans who worry that a point-in-time measurement that differs from sponsor practices gives agency officials a compelling argument to raise premiums instead of considering other changes, including rebalancing the investment portfolio as interest rates rise.

“The PBGC and the academy need to do more analysis of why a single day's interest rate is the right way to measure a 50-year liability,” said Kent Mason, an attorney with Davis & Harman who is outside counsel to the American Benefits Council.

But Donald Fuerst, senior pension fellow at the actuaries group, said his group's analysis does not make the case for premium increases, which the analysis warns could be counterproductive. “We're hoping that it will put more attention on the premiums structure, rather than just raising premiums. We think they should look for new sources,” Mr. Fuerst said in an interview.

PBGC Director Joshua Gotbaum is asking Congress to give his agency the authority to set its own premiums, based on plan risk instead of flat rates for all plans.

The actuaries group notes that rising interest rates can have an offsetting effect on asset returns, but the agency's underwriting risk remains high, as funding ratios and the number of corporate defined benefit plans decline.