The administration's proposal to erase the PBGC deficit rests on three key elements: an overhaul of funding rules; a restructuring of the premium structure; and more honest accounting by companies of their funded status.
The changes in funding rules are linked to the creditworthiness of employers so that financially weak companies would have to fund toward higher targets than financially viable companies.
But the proposed changes in PBGC insurance premiums ignore the viability of companies, and instead would slap variable-rate premiums on companies whose funding levels drop below 100%, regardless of their risk of becoming bankrupt. And this is what Ms. Coronado and Mr. Schieber focused on in their research.
In 2004, they analyzed the funded status of 471 large companies (about 75% of the Fortune 1000 with defined benefit plans, based on the numbers reported in their financial statements). They assumed the termination liabilities would be about 15% higher than the reported numbers. And they studied the premiums those companies paid to the PBGC last year.
Because of the link between companies' creditworthiness and their likelihood of declaring bankruptcy, Ms. Coronado and Mr. Schieber examined the premiums paid by the 106 companies in the sample with below-investment-grade credit ratings, as well as the 365 companies with investment-grade ratings.
Then, they simulated the impact of the administration's proposal on the companies, finding that profitable companies would bear a 240% increase in their PBGC premiums, while financially troubled companies with junk-bond ratings would see their premiums increase 113%.
Thus, the premium increases for healthy companies would be more than twice that of unhealthy ones.
PBGC insurance premiums account for about 15% of the administrative cost of pension plans for the largest companies. The researchers found that the Bush proposal would cause the administrative costs of defined benefit plans to more than double.
Under current rules, companies that are likely to fail and shut down their underfunded plans pay PBGC premiums corresponding to only 8% of the expected PBGC loss. By contrast, financially healthy companies pay premiums to the federal insurance agency amounting to 66% of the expected loss.
Under the changes proposed, financially weak companies would pay premiums to the PBGC equal to only 16% of their expected losses, while profitable companies would pay premiums equal to 340% of their expected losses. The Bush administration said its proposal would end the subsidy by making the PBGC premiums "risk-based," so that weak companies would pay proportionately more, but the Watson Wyatt paper indicates the proposal would have the opposite effect.
Because the probability of companies' being profitable one year and failing the next is only 0.5%, vs. 4% for financially weak companies, the administration's proposal places a far greater burden of shouldering increased PBGC premiums on the profitable firms than the unprofitable firms.
To make the proposal more equitable, the Watson Wyatt researchers suggest financially weak companies pay premiums eight times higher than those paid by profitable companies.
A PBGC spokesman said officials had not studied the Watson Wyatt paper and could not comment on it.