Pensions & Investments' April 17 editorial sees the current surplus of the Pension Benefit Guaranty Corp. as a signal to cut premiums. But that view has serious flaws. It presumes today's near-perfect economic conditions will never go away. And it ignores the PBGC's exposure to some $17 billion to $19 billion in unfunded pension liabilities of companies with bond ratings below investment grade. Many of these firms are in cyclical industries and vulnerable to economic fluctuations.
In light of these substantial risks, the PBGC is prudent to continue using conservative yet reasonable actuarial assumptions. There is no room for creative accounting when you are insuring the pensions of 43 million workers.
The PBGC now has a surplus because of the strong economy and no large terminations of underfunded plans. But in its 25-year history, the agency has operated with deficits for all but the most recent four years.
In its most recent report on the PBGC, the General Accounting Office stressed that "an economic downturn and the termination of a few plans with large unfunded liabilities could quickly reduce or eliminate PBGC's surplus." Likewise, PricewaterhouseCoopers, our independent auditors, caution that if "contingent losses become more likely" the surplus "could be depleted." Clearly, we must remain vigilant.
As you rightly point out, the defined benefit system needs strengthening. Alongside the administration's proposals to encourage defined benefit plan coverage, we have made a number of improvements in the insurance program for plan sponsors and pension practitioners. We are firmly committed to providing premier service and constantly looking for more ways to improve.
But the best service we can give our customers is to use our current positive financial position to provide a pension insurance program that stays solvent -- even when the economy weakens and business failures increase. We have an historic opportunity to accomplish this. To let it pass and bet that good times will never end would be irresponsible.
David M. Strauss is executive director of the Pension Benefit Guaranty Corp., Washington.