The next bailout?

$34 billion shortfall estimate sparks renewed talk of taxpayer help for PBGC

A new report that showed the Pension Benefit Guaranty Corp.'s deficit could swell to $34 billion in the next 10 years has sparked fresh debate as to whether a multibillion-dollar infusion of taxpayer cash will be required to keep the agency afloat.

“The realistic option is that Congress will have to provide a bailout,” James Keightley, a former PBGC general counsel who is now a partner at the law firm Keightley & Ashner LLP, Washington, said in an interview.

“After the money they (federal agencies) have thrown at saving financial institutions, $30 billion is chump change,” Mr. Keightley said.

However, not all agree on the need for a bailout, with some pension industry analysts saying concerns about the PBGC's health are way overblown — at least in the short term. They say the PBGC, which had $68.7 billion in assets as of Sept. 30, 2009, has plenty of cash to pay off the pension benefit obligations of the plans it takes over for years.

“I expect to be dead before the PBGC needs a bailout,” said Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, Washington, and a former special assistant to the PBGC executive director and acting director of public affairs at the PBGC.

PBGC's solvency is on the front burner again because the agency's annual report for 2009, released May 4, projected a possible deficit of $34 billion by 2019.

The report said the agency's single-employer pension plan program could have a deficit of $30 billion in 10 years, while its multiemployer plan program could see a shortfall of $4 billion by then.

The deficits represent the average possibilities for the two pension programs calculated using the PBGC's pension insurance modeling system, or PIMS.

As of Sept. 30, the PBGC's single-employer program had a deficit of $21.1 billion, with $68.7 billion in assets and $89.8 billion in liabilities, according to the agency's annual management report, which was issued in November.

The multiemployer plan program, as of Sept. 30, had an $870 million deficit, with assets of $1.45 billion and liabilities of $2.32 billion.

Bailout speculation is nothing new

There has been speculation for years that the PBGC might need a bailout in the long term.

“It's certainly more likely than not that PBGC will remain insolvent in the long term, but the degree of that insolvency is sufficiently unclear that I think it's premature to talk about a bailout now,” added Bradford P. Campbell, former assistant Labor secretary for the Employee Benefits Security Administration and now of counsel to the law firm Schiff Hardin LLP, Washington. The EBSA head serves as the chief liaison to the PBGC's three-member board, which consists of the secretaries of Labor, Treasury and Commerce.

Still others argue that — even assuming the agency needs a bailout in the distant future — taxpayer dollars are not the only solution.

“It's not clear whether PBGC will ever run out of money,” said Nell Hennessy, president and CEO of Washington-based independent fiduciary firm Fiduciary Counselors Inc. and a former deputy executive director and chief negotiator for the PBGC. “But if that happens, Congress will be faced with a choice of either cutting PBGC's guaranteed benefits or putting taxpayer money in.”

In the 2009 annual report, PBGC said that there were three basic options for closing its deficit: slash benefit payments to beneficiaries of the pension plans it takes over; increase the premiums it charges to plans it insures; and strengthen the funding requirements for plans.

All of the options come with problems. Cutting PBGC benefits could cause severe distress to retirees who are counting on their payments. Increasing premiums might also spur sponsoring companies to pull the plugs on their plans. And the Pension Protection Act of 2006 is already pushing the ever-dwindling ranks of DB plan sponsors toward full funding.

Another possible fix, at least according to lobbyists for corporate plan sponsors, would be for the PBGC to adopt a more aggressive investment policy, tilted toward equities.

The Obama administration's PBGC board in May last year suspended a more aggressive investment policy adopted during the Bush administration, that called for target allocations of 45% each in equities and fixed income, with the remaining 10% in alternatives.

The previous asset allocation, in place since January 2004, was 75% to 85% in fixed income and 15% to 25% in equities, emphasizing duration matching of fixed-income investments to maturing PBGC liabilities.

Last October, the Obama administration board directed that the agency “prudently rebalance” and reduce PBGC's investments in equities. As of Sept. 30, the PBGC had 60% of its $54 billion investment portfolio in fixed income and cash, 37% in equities, and the remaining 3% in other assets, including alternative investments inherited from plans the PBGC oversees. At the time, sources close to the agency said the board signaled that it wanted the PBGC to return to the roughly 70% fixed income/30% equities split the agency had in place as of March 31, 2009, (Pensions & Investments, Nov. 30).

“They've got $68 billion here,” said Mark Ugoretz, president of the ERISA Industry Committee, Washington. “That's a lot of capital to make money on.”

Nonstarter: Investing their way out of the hole

But others don't see a more aggressive investment policy as a long-term fix.

“I don't think there's any realistic way they can invest their way out of this deficit,” said Mr. Keightley.

In an interview, Bradley D. Belt, former PBGC executive director and chairman of Palisades Capital Management LLC, Washington, said the solution to the PBGC's deficit is two-pronged: Strengthen plan funding requirements and impose risk-based premiums that more accurately reflect the expected losses to the insurance program.

“If you don't do those things, you will be left with a PBGC that has a chronic deficit,” Mr. Belt said. “Then the question becomes who pays for it? The sponsors, beneficiaries, taxpayers or some combination thereof?”

“Given that pensions are able to be continually underfunded, and that sponsors can take on significant investment risk in the plans, the system essentially ensures that the PBGC will operate in a deficit position, and it is likely that the deficit position will grow over time,” Mr. Belt said.

Phyllis Borzi, assistant secretary of labor for EBSA, had not returned telephone calls at deadline seeking comment on what the administration plans to do about the PBGC's deficit.

Reached by telephone, Joshua Gotbaum, President Obama's nominee as PBGC director, declined comment. But during his confirmation hearing before the Senate Health, Education, Labor and Pensions Committee on Jan. 20, Mr. Gotbaum said the agency wouldn't be able to eliminate its deficit on its own because Congress controls the size of the premiums the agency can charge and the amount of benefits the agency must pay.

“The best investment policy will not solve all the issues PBGC faces,” Mr. Gotbaum testified. “There can be no resolution of the deficit without Congress being involved.”

Mr. Gotbaum's nomination was approved by the Senate HELP Committee on May 5; the nomination goes to the Senate Finance Commission, which has 30 days to consider it. If that panel approves the nomination, the full Senate will vote on it.

If confirmed, Mr. Gotbaum, now an operating partner at private equity firm Blue Wolf Capital Management LLC, New York, will succeed Charles E.F. Millard, who stepped down on Jan. 20, 2009. Vince Snowbarger, PBGC deputy director of operations, is the agency's acting director.