A series of recently issued reports have addressed various governance and financial challenges facing the Pension Benefit Guaranty Corp. The takeaway from all of them is that unless changes are made in the way the federal pension insurance system is governed and financed, there is a heightened risk that taxpayers will be called upon to bail out the system within the next decade.
The most recent is the June 30 PBGC “Projections Report,” which assesses the financial condition for the coming decade of the two insurance programs administered by the agency. The good news is the condition of the single-employer program has improved. However, notwithstanding favorable market conditions, the multiemployer program has deteriorated alarmingly.
The PBGC estimates that under current law the deficit will widen to almost $50 billion by 2023 from less than $9 billion in 2013. Both it and the non-partisan Congressional Budget Office project the multiemployer fund will run out of money by 2021. Will taxpayers have to bail out the PBGC, even though most taxpayers don't have pensions? Or does Congress let the PBGC go bankrupt, cutting off the pensions of millions of people depending on the money for retirement? We might not have to face that dilemma if three critical changes are made to current law.
The first is to recast the irrational premium structure mandated by Congress. Private-sector and other government insurance programs adjust premiums to cover actual and expected insurance losses. That is not the case with the federal pension insurance program. The PBGC lacks authority to set premium levels to cover losses or adjust them for more risky corporate sponsors. This is in contrast to the authority of the Federal Deposit Insurance Corp. to set premium levels for the bank deposit insurance fund, and the PBGC's U.K. counterpart, the Pension Protection Fund.
Prior to passage of the Pension Protection Act in 2006, premiums for the single-employer program were clearly insufficient to cover losses in the program. Since that time, Congress has mandated several increases in both flat-rate and variable-rate premiums paid by plan sponsors. The result is that premiums are now too high in the single-employer program, especially for those employers that pose a minimal risk to the insurance fund. As noted in a May U.S. Chamber of Commerce report, “PBGC Looking Forward,” premium increases have less to do with ensuring the viability of the insurance program than offsetting the budgetary costs of other unrelated federal spending. Even though the PBGC receives all of the premium dollars, Congress and the Office of Management and Budget characterize PBGC premiums as offsetting collections, basically scored as federal revenue. On the other hand, premiums covering the more troubled multiemployer program have not been raised commensurately and are wholly insufficient to cover expected losses. They should be raised.
The current premium-setting process is misguided. It results in responsible plan sponsors effectively subsidizing companies that take undue risks, make unaffordable promises and chronically underfund their pension plans. It enables Congress to use the pension insurance program as a convenient ATM to fund other government spending. Congress should get out of the premium-setting game and empower the PBGC to set premiums, subject to reasonable objectives and parameters — just as it has done with the FDIC.
The second change is to revamp governance of the PBGC. The PBGC's board is composed of the secretaries of labor, treasury and commerce. This is problematic for several reasons:
- It is a collateral-duty function for the cabinet secretaries, typically delegated to subcabinet officials, who should be focused on their day jobs, i.e., running their own departments;
- It occasionally creates conflicts between the interests of the department and of the PBGC — conflicts that are unacceptable in a fiduciary context; and
- Decisions made are viewed as being driven by political considerations — in Democratic administrations, businesses view the PBGC as biased toward labor and in Republican administrations, unions consider the PBGC to be doing just the opposite.
The way to solve this is to take the PBGC out of politics as much as possible by establishing a board that doesn't change hands each time the White House does. The PBGC board should comprise financial market and pension experts drawn from both parties and business and labor. I made that recommendation to the PBGC board in 2006 and it is a position that has been espoused by both the Bush and Obama administrations and by the Government Accountability Office. It was also recommended by the National Academy of Public Administration, which earlier this year released a report on PBGC governance issues. This is not a partisan or political issue. Taxpayers, responsible corporate plan sponsors, and plan beneficiaries would be better off if the PBGC were run more like a business — and less like another bureau in the Department of Labor.
In the vein of having the PBGC run more like a business, the third change is the agency should have broader authority to work with both distressed corporate sponsors of single-employer plans and contributing employers and trustees of multiemployer plans to craft financial solutions to address specific problems and challenges. This includes enhanced authority to merge and partition plans, implement corrective action plans, enter into commercially responsible financial settlements and even use the PBGC balance sheet to offer bridge financing in appropriate circumstances.
Under current law, the PBGC's hands are effectively tied in dealing with other stakeholders in distressed situations, which inevitably leads to suboptimal outcomes, not only for the insurance program, but also for plan sponsors. Commercial creditors and insurers, as well as most other federal government insurance entities, have much broader resolution authority, and with good reason. In both commercial and financial regulatory settings, rational parties will often conclude that each is better off agreeing to accept some current losses to forestall larger losses down the road.
Improving the PBGC governance structure and empowering it to set risk-adjusted premiums at appropriate levels, and enabling the agency to craft rational financial settlements are not going to fix all that ails the federal pension insurance program — but would be significant steps in the right direction and might be enough to avoid making the PBGC the next bailout.
Bradley D. Belt, Washington-based vice chairman of Orchard Global Asset Management, an alternative asset management firm, was executive director of the Pension Benefit Guaranty Corp. from April 2004 to May 2006.
