PBGC program set for reversal of fortune

The Pension Benefit Guaranty Corp.'s good news, just six months ago, that its single-employer program enjoyed a healthy surplus could become another casualty of the current economic crisis.

As sponsors of some of the largest pension plans now wrestle with plummeting revenues and market values, the prospect of the PBGC having to step in if they wind up in bankruptcy suddenly seems less far-fetched.

While the picture is rapidly changing, a look at large sponsors already harmed by the COVID-19 outbreak shows some big potential hits for the PBGC as an insurer. According to 10-K information filed with the Securities and Exchange Commission, as of Dec. 31, General Electric Co. had $19.1 billion in unfunded pension liabilities and The Boeing Co. had $15.9 billion, followed by Exxon Mobil Corp. with $7.3 billion, and General Motors, Delta Air Lines Inc. and American Airlines Group Inc., each with just less than $5.5 billion in unfunded liabilities.

In November, the PBGC annual report showed single-employer program assets of $128.1 billion and liabilities of $119.4 billion as of Sept. 30, thanks to record premiums, investment income and modest losses from plan terminations.

PBGC officials declined to comment on potential impacts of the COVID-19 crisis at this time, but observers note that agency officials keep a close handle on potential problems at companies.

"That's one reason they've enhanced the notification requirements" for companies experiencing events that may signal problems, said John Lowell, Atlanta-based partner at October Three Consulting LLC, an actuarial consulting firm specializing in defined benefit and cash-balance plans. "They stay on top of this. On the single-employer side, they do not appear to be in danger right now."

The agency also has a buffer against immediate asset losses since any benefit obligations it might take on would not come due immediately.

Corporate plan sponsors are not so lucky.

"The bigger problem for PBGC is if companies go bankrupt because they do not get funding stabilization, and pension obligations put them out of business. That would be bad all around — for employees, employers and the PBGC," said Lynn Dudley, senior vice president, global retirement and compensation policy for the American Benefits Council, Washington.

Funding stabilization, a practice allowed by Congress during previous financial crises, lets plan sponsors use a higher interest rate to calculate liabilities and minimum contributions. It was scheduled to start phasing out next year, so Congress would need to change that timeline.

"We are very concerned about member companies that sponsor defined benefit plans and are experiencing significant asset drops and unexpectedly high contribution rates," said Aliya Robinson, senior vice president of retirement and compensation policy for the ERISA Industry Committee in Washington.

Plan sponsors groups are now waiting for regulators to allow the PBGC to relax some notice and reporting deadlines during the crisis.

Congress did give a bit of relief in the economic stimulus package enacted March 27 by letting sponsors delay making 2020 contributions until January 2021, with interest. "Our clients are happy to get this relief, but they will need more," said Tonya Manning, U.S. wealth practice leader and chief actuary with Buck Global LLC in New York. "It's really not funding relief, it's cash-flow relief." It could allow enough of a breather for some distressed companies to survive, "but what would not benefit the PBGC is if they have to decide to close the business," Ms. Manning said.

To head off dire consequences that could also become the PBGC's problem, employer groups would like Washington policymakers to grant several more types of relief.

At the top of the list is some relief — even temporarily — from PBGC premiums that have skyrocketed in a few short years, thanks to Congress' repeated hunt for revenue to offset other federal budget items. In 2020, the per-participant flat-rate premium is $83, but the bigger hit comes from the per-participant variable-rate premium based on unfunded vested benefits, up to a per-participant cap of $561. Rates that were $9 a participant in 2013 are now $45, and will continue to rise with inflation.

As defined benefit sponsors now start figuring out how much cash they will need to weather this latest economic crisis, their tabs for underfunding-related premiums could lead to sticker shock. Some sponsors have found the current low-interest-rate environment a good time to borrow enough to fund up their plans and avoid what is essentially a 4.5% tax on underfunding, while some others consider reducing head counts in their plans through annuity purchases or making accelerated payments to get ahead of the 2021 variable premium bill.

"An insurance company is not going to charge a variable premium. I expect there will be discussions for plan sponsors who can afford it to view these premiums as something they would rather not pay," Mr. Lowell said.

High on sponsors' list is slowing down the scheduled phaseout of interest rate stabilization, which plan sponsors were starting to dread even before the crisis triggered plummeting asset values.

Between record low interest rates and stock market losses, "companies may find themselves struggling for months or years to regain their footing," Mercer president and CEO Martine A. Ferland said in a March 18 letter to members of the Senate Finance Committee. Waiting until 2026 to start gradually phasing out the interest rate stabilization provisions and increasing minimum stabilized interest rates, to 95% of a 25-year average of segment interest rates, from 90% would lower aggregate corporate pension obligations by about $180 billion as of Jan. 1, 2021, and $250 billion as of Jan. 1, 2022, and free up "a significant amount of cash for companies to invest in their businesses and support the long-term health of the economy," Ms. Ferland said.

Mr. Lowell of October Three Consulting said his firm has been warning clients for years to prepare for the end of interest rate stabilization, and that was "before stuff happened."

"For 2021 contributions, if the markets stay down and interest rates stay down, then we get sort of a double whammy," Mr. Lowell said. "You will see some significant increases in liabilities. Even for well-funded plans, this may mean that they come out of full funding. Everything is company-specific, but I don't see anybody coming out well."

Sponsor groups would also like Congress to lengthen to 15 years the current seven-year period for amortizing funding shortfalls, and to ease some pressing reporting deadlines. While some of those requests were addressed in a House stimulus proposal, they did not make the final package, so the topics are expected to come again when Congress considers further economic relief legislation.