The Pension Benefit Guaranty Corp. would raise the rates for the premiums it charges defined benefit plan sponsors to help the financially strapped agency slash its budget deficit, under a proposal unveiled Nov. 17 by a Washington think tank headed by influential former federal policymakers.
“This proposal seeks to improve the PBGC's long-term financial condition, and align premium costs more closely with the risk that participating companies pose,” said the recommendation in “Restoring America's Future,” a report released Nov. 17 by a task force of the Bipartisan Policy Center, Washington.
Under the proposal, the PBGC's fixed-rate premiums would rise 15%, and the variable-rate premium would rise to $12 per $1,000 of underfunding from $9.
The PBGC's current fixed-rate premium is $35 per participant per year.
The task force, headed by former Sen. Pete Domenici and Alice Rivlin, who was director of the White House's Office of Management and Budget during the Clinton administration, also recommended that the variable premium be based at least in part “on the riskiness of a private pension plan's investment allocation (e.g., how much is invested in stocks vs. bonds),” the report said.
PBGC executives were not commenting on the proposal, said Jeffrey Speicher, an agency spokesman.
But in the agency's financial report for the year ended Sept. 30, PBGC Director Joshua Gotbaum attributed the agency's $23 billion deficit in part to “inadequate plan funding and misfortunes that have befallen plan sponsors.”
“In part, it is a result of the fact that the premiums PBGC charges are insufficient to pay for all the benefits that PBGC insures, and other factors,” Mr. Gotbaum added in the financial report, which was released Nov. 15.
Employer group representatives said the think tank's proposal to raise the premiums, if enacted, could spur sponsors to pull the plug on plans — thereby adding to the agency's financial woes.
“Right now, you've got a lot of frozen plans that could some day be thawed,” said Mark Ugoretz, president of the ERISA Industry Committee, Washington, in an interview.
“If you increase the cost of maintaining those plans, it's an invitation to permanently get rid of them,” he continued.
“Tinkering with the premiums will do little to fund the PBGC deficit,” added James Keightley, a former PBGC general counsel and now partner with the law firm Keightley & Ashner LLP, Washington, in an e-mailed response to questions.
“Tying the variable-rate premium to the risk profile of the pension asset pool would either be an administrative nightmare requiring risk rating of each asset, or an arbitrary percentage based on an equity/bond percentage that would not really measure risk,” he added.
The agency's latest annual report said the PBGC's single-employer pension plan program had a $21.6 billion deficit as of Sept. 30, up 2.5% from a year earlier. The PBGC's multiemployer plan program had a deficit of $1.4 billion as of Sept. 30, 68% above the previous year.
The PBGC report also said the agency's portfolio returned 12.1% on its investments for the fiscal year ended Sept. 30, leaving the agency with total investible assets of $66.8 billion. Its remaining combined assets from both the single-employer and multiemployer plans are from failed plans that have yet to be invested.
The single-employer plan program had assets of $77.8 billion and liabilities of $99.4 billion as of Sept. 30, compared with assets of $67.6 billion and $88.7 billion in liabilities a year earlier. The multiemployer plan program had assets of $1.6 billion and liabilities of $3 billion as of Sept. 30, compared with $1.45 billion in assets and $2.33 billion in liabilities 12 months prior.
On May 20, 2009, the agency told Congress that the agency's deficit had reached an all-time high of $33.5 billion as of March 31, 2009.
The fiscal 2010 deficit was smaller than the PBGC anticipated because several plan takeovers expected when it calculated the $33.5 billion deficit didn't happen, Marc Hopkins, a PBGC spokesman, said in an interview. “That was an unaudited midyear report to Congress which they requested,” Mr. Hopkins said. “It's not something we do ordinarily.”
According to the report, 31.1% of the PBGC's portfolio was in equities as of Sept. 30, down from 37.2% at the end of the previous fiscal year. Cash and fixed income represented about 66% of the total investible assets at the end of the fiscal year, up from 60% at the end of the previous fiscal year. The remainder was invested in alternatives, including private equity, private debt and real estate.
The equity portfolio reduction was in response to a temporary investment policy established by the agency's board in October 2009 to “prudently rebalance the portfolio and reduce PBGC's investment in public equities to no more than 26.5%,” the percentage held as of March 31, 2009, the agency's annual report explains. The reduction will continue.
The PBGC board had previously suspended its policy under the Bush administration, approved on Feb. 12, 2008, calling for target allocations of 45% each in equities and fixed income, with the remaining 10% in alternatives, including private equity and real estate.
A new investment policy is still being developed by Mr. Gotbaum and the agency's board, Mr. Hopkins said.
In a Nov. 15 news release, PBGC said that during the year ended Sept. 30, the operations of 38 companies emerged from Chapter 7 or Chapter 11 bankruptcy proceedings with ongoing plans, keeping about $4 billion in obligations off the agency's books.
The annual report also said the agency took in $2.3 billion in premiums and had $7.8 billion in investment income during the year ended Sept. 30.