The American Benefits Council sought to clarify common misconceptions that could result from the Pension Benefit Guaranty Corporation’s (PBGC) 2014 annual report, in which it claims a $36 billion deficit for the 2013 fiscal year. In 2012, the agency reported a deficit of $34 billion. The agency reported that the deficit for the single employer guarantee program declined by $1.7 billion, while for the multi-employer system it grew by $3 billion.
“The agency’s reported deficit is a projection based largely on unrealistic assumptions and does not reflect the actual health of the PBGC or the defined benefit pension system. It certainly should not be used to justify raising premiums – yet again – paid by pension plan sponsors,” American Benefits Council President James A. Klein said.
“In recent years when the single employer program deficit was reported to increase, PBGC and some in Congress cited that as justification to raise premiums. By that same logic, the PBGC and Congress should now advocate lowering premiums as this year’s deficit dropped by $1.7 billion. But, in fact, it makes no sense to raise or lower premiums based on a year-to-year fluctuation caused largely by short term factors and inappropriate assumptions,” Klein noted.
“The PBGC’s deficit is a ‘snapshot’ measure of current assets minus liabilities. As a result, it does not accurately reflect the funded status of active ongoing plans,” Klein said. “All pension fund liabilities, including the PBGC’s, are overstated by the historically and artificially low interest rates of recent years. Keeping interest rates low is good policy to stimulate the economy, but it has the perverse effect of making very secure pension funds and the PBGC’s own situation appear underfunded,” Klein said.
For many years, the Council has urged lawmakers to take a fresh look at the methodology behind PBGC’s deficit calculation, to promote a more common-sense approach to funding and premium policy. Many factors in the calculation remain wholly inappropriate, such as aggressive assumptions based on “distress” terminations and the purchase of annuities for its beneficiaries when, in fact, the PBGC does not do so. Other elements of the methodology are shrouded in secrecy, such as how its annuity survey and modeling are conducted.
The Obama Administration and Congress are proposing raising PBGC premiums on plan sponsors as a source of revenue to help strike a budget deal. “Doing so would further discourage plan sponsors from remaining in the system when the current low interest rate environment is already forcing employers to pour more money into plans that may never be needed. As more companies are forced to exit the system, the universe of plans from which premiums are collected further shrinks. That certainly does not serve the PBGC’s interests” Klein concluded.
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