WASHINGTON -- The PBGC's surplus skyrocketed to $3.5 billion last year, more than 300% higher than the year before.
The surplus resulted from the continuing bull stock market and an unprecedented economic boom prompting fewer employers to shutter their pension plans.
Employers, naturally, are using the record surplus as ammunition in their battle to convince the PBGC to reduce the premiums plan sponsors pay to the agency.
"We had a very good year," said David M. Strauss, executive director of the Pension Benefit Guaranty Corp. in an interview with Pensions & Investments last week.
ITS SECOND SURPLUS
Last year's surplus was the second since the agency was created in 1974. Its 1996 surplus of $869 million was the PBGC's first. The PBGC's surplus and other statistics are reported as of Sept. 30 of each year, the close of its fiscal year.
But Mr. Strauss said it is much too soon to be talking about any cuts in the insurance premiums.
After all, he said, the agency's surplus was generated in a period of "perfect" economic and stock market conditions, which probably will not last.
What's more, the PBGC could be responsible for as much as $21 billion in claims (based on the current funding shortfall at companies) if the economy tanks and companies run into financial problems.
MORE GROWTH POSSIBLE
Under a rosy scenario, the agency's surplus could grow to $8 billion by 2007, according to estimates in the agency's 1997 annual report that was released March 23. At the other extreme, the agency could suffer a $17.1 billion deficit by the end of the next decade.
Mr. Strauss declined to specify how much of a surplus would be large enough for the agency to consider cutting its premiums, saying only: "The goal clearly has to be to have assets on hand for a reasonable margin of safety for unexpected events."
Mr. Strauss did say the agency is studying how much of a safety net it needs to have, before it can even begin examining the possibility of a premium cut.
"This is not a judgment that should be made without doing a thorough analysis," he noted.
The agency's analysis takes into account its investment strategy, the way it values liabilities and the possibility of pension plans shutting down under various economic conditions, according to a PBGC spokeswoman.
Besides, Mr. Strauss noted, the agency's variable rate premium already has begun falling because of changes in the law in 1994, and stricter funding limits. And because most employers pay a flat premium, cutting the variable premium might not be fair to those employers, Mr. Strauss said.
The agency earned only $386 million from variable rate premiums in the year ended Sept. 30, compared with $519 million a year earlier. By the end of the century, when some changes from the Retirement Protection Act of 1994 kick in, the agency's income from variable rate premiums is expected to drop still further, to less than $200 million.
Employers with fully funded plans pay the PBGC the flat insurance premium of $19 per plan participant. Underfunded plans used to pay an additional charge, capped at $53 per participant, which was phased out last year.
Now, underfunded plans pay the $19 premium, plus $9 for every $1,000 of unfunded vested benefits. More than 80% of workers covered by PBGC insurance are in plans that pay the $19 premium.
For the financial year ended Sept. 30, the agency's single-employer program had assets of $15.3 billion and liabilities of $11.8 billion.
The agency reported nearly $2.8 billion in investment income for its single-employer program, and $1.1 billion from insurance premiums, compared with $927 million in investment income in 1996 and $1.2 billion in insurance premiums.
The agency's multiemployer program, also reported a surplus of $219 million on assets of $596 million and liabilities of $377 million, according to the agency's latest annual report. The program reported a surplus of $124 million last year.
This program, which has been in the black for more than 15 years, reported investment earnings of $68 million up from $12 million in 1996.
The agency continued to increase its exposure to stocks, investing 38% of its $15.6 billion in assets in equities in fiscal 1997, compared with 36% the previous year.
The agency kept the bulk of the remaining 62% in cash and fixed-income securities, down a corresponding notch from the year earlier. The agency kept a very small portion of its assets in real estate and insurance contracts.
Because of legal limits, the federal agency must invest all of the money it gets from insurance premiums -- 61% of the agency's total assets last year -- in fixed-income securities. The PBGC typically keeps most of the assets it acquires from terminated pension plans in equities.
The PBGC's overall return was 21.9% on its $15.6 billion in investments in fiscal 1997.
Its stock portfolio returned 37.6%. The Wilshire 5000 returned 38% for the same period and the Standard & Poor's 500 stock index, 40.4%.
Its fixed-income portfolio returned 13.5% in fiscal 1997, compared with 13.2% for the Lehman Brothers Long Treasury Index.
Meanwhile, the agency paid out $824 million in benefits as of Sept. 30, up 4% from the $792 million it paid out in fiscal 1996. It has become responsible for 2,510 pension plans, including 165 that were shut down in fiscal '97, down from 255 that were terminated the previous year.
The number of fully funded terminated pension plans, mostly among small businesses, has decreased, in part, because of the healthy economy, and in part because there are fewer small businesses with traditional pension plans, an agency spokeswoman explained.
At the same time, the agency last year monitored 500 companies under its Early Warning Program, and reached agreements worth about $760 million with 17 companies.
This program alerts the agency to pension plans that could run into trouble. Under this program, the PBGC monitors pension plans with unfunded liabilities greater than $5 million, and attempts to reach agreements with these companies before they terminate their plans.
The PBGC also was involved in 85 lawsuits in state and federal courts, and 790 bankruptcy cases.
Additionally, the agency located 554 of 4,734 missing participants companies asked it to track down, and paid out nearly $1 million in benefits to 510 of them, in the second year of its effort to help companies locate people covered by terminated plans.
