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Regulation

Companies continue to feel PBGC’s heat

Pension execs say agency too aggressive on liabilities as part of business shutdowns

031813 gadre
Ajit Gadre says the PBGC has been flexible with its escrow deposit requirements.

Representatives of corporate pension plan sponsors say they have yet to see the kindler, gentler PBGC — at least when it comes to a section of ERISA that gives the agency the power to put its hand in the wallet of companies experiencing financial problems.

The announcement last fall by Joshua Gotbaum, director of the Pension Benefit Guaranty Corp., Washington, that his agency was going easier on defined benefit plan sponsors experiencing business shutdowns was supposed to make employers happy, or at least less grumpy. Yet despite new figures showing the agency has passed up the opportunity to impose nearly $1 billion in additional pension funding demands, plan executives still complain the agency holds all the cards.

“They will work with you, but they still tend to be fairly aggressive,” said attorney Brian Dougherty, a partner in the employee benefits and executive compensation practice of law firm Morgan Lewis & Bockius LLP in Philadelphia.

Corporate pension executives have been griping since 2007, when PBGC officials figured out a formula for calculating pension liabilities that could be assessed under Section 4062(e) of the Employee Retirement Income Security Act in the event of operational shutdowns, and started aggressively enforcing the law, which allows the agency to act if 20% or more of employees covered by a defined benefit plan will lose their jobs.

That enforcement has led corporate executives to complain of agency overreach in cases involving routine business transactions that do not threaten pension plans. But Ajit Gadre, program manager for the PBGC's corporate finance restructuring group, counters that the agency is simply doing what it is supposed to do when companies' financial situations change.

“We've been interpreting the law as Congress requires us to do,” he said. “We adopted a very plain-language approach.?For example, "cessation of operations at a facility' means that a company stops doing some discrete, identifiable activity at a place.”

PBGC officials acknowledge the more consistent enforcement in recent years has rattled employers, and are hopeful that the pilot program announced last fall that exempts companies deemed to be financially sound will allay fears. That, plus an exemption for plans with 100 participants or less, puts 92% of plan sponsors on the sidelines, the officials say.

Suspending negotiations

To prove their flexibility, PBGC officials told Pensions & Investments the agency is suspending 4062(e) negotiations with 17 companies where it initially sought $450 million in financial guarantees, including Anheuser-Busch InBev North America, St. Louis; Whirlpool Corp., Benton Harbor, Mich.; and Procter & Gamble Co., Cincinnati. It also decided not to start negotiations with another 30 companies representing $475 million in pension liabilities.

But plan executives are not ready to celebrate. They are pressing the agency to ease up on other issues, including a more limited interpretation of a triggering event.

“Employers are often surprised to learn that PBGC can treat the liability as being triggered in circumstances that go well beyond a typical plant closing,” said Harold Ashner, former PBGC assistant general counsel for legislation and regulations whose law firm Keightley & Ashner LLP, Washington, represents corporations in 4062(e) cases.

Examples that employers point to as PBGC overreach include when only one of multiple operations at a facility is discontinued; a transfer of activities to another location with no change in jobs or revenue; and when an ongoing business is sold in an asset sale that does not interrupt operations or employment.

Then there are the financial calculations for determining liability, which are based on the PBGC's more conservative plan termination basis. Sponsors are particularly unhappy that the liability formula is based on the entire pension plan population and level of underfunding, even if a small number of employees are affected by the shutdown; that can result in millions of dollars being put aside, “even though there's no reason to terminate the plan and no intention to terminate it,” said Mr. Ashner.

One example provided by the American Benefits Council, Washington, involved an unidentified member company that had 24,000 employees and several pension plans, some frozen. The Company closed one facility and transferred the employees to another. When 21 employees declined to transfer, the PBGC calculated a $21 million liability because one frozen plan with just 100 active employees was underfunded by $100 million.

The problem has become more acute in the recent low-interest-rate environment that has caused pension plan funding levels to plummet.

Another 4062(e) worry of plan executives is whether the PBGC will proceed with rulemaking proposed in 2010 that was widely panned by the business community before it was sent back to the drawing board. That backlash led in part to the PBGC's new approach, which was dictated by a White House directive that federal agencies review regulations that hamper business and economic growth.

For the 8% of employers still susceptible to 4062(e) actions, and other employers that could cross the agency's radar if their finances or business operations change, agency officials say they will negotiate to accomplish their goal of protecting pensions without causing too much pain.

In contrast to Section 4062(e)'s requirement that the agency demand a bond or escrow deposit up to 150% of the amount of pension liability as determined by the PBGC, the agency will consider lesser guarantees, such as a letter of credit or a binding obligation to be triggered if circumstances change, said the PBGC's Mr. Gadre.

“Since 2007, we've offered a third option to resolve the liability, which is to work with them to find an equivalent basis that is feasible,” said Mr. Gadre. “We have quite a bit of flexibility in how we come to this. It's really up to them.”

“There are ways of settling the liability with PBGC that can be relatively pain-free for the employer,” agreed Mr. Ashner, “but great care should be taken in working out the terms of the settlement.”

“Our goal is not to impede business decisions,” Mr. Gadre insisted.

That may be, but the business community is not quite ready to relax about the PBGC's approach. “They don't want to put anybody out of business,” said Lonie Hassel, a former PBGC assistant general counsel who now co-chairs Groom Law Group's plan funding and restructuring practice in Washington, “but they do make them jump through some hoops.” n

This article originally appeared in the March 18, 2013 print issue as, "Companies continue to feel PBGC's heat".