Letter to the Editor ¦ March 7, 1994
Clinton's PBGC reforms
Response to the December 13th Article

By Martin Slate, Executive Director, PBGC, Washington

David Langer's Dec. 12 [sic] commentary on the Clinton administration's reform proposals for the Pension Benefit Guaranty Corp. -- "Too much reform for a still manageable problem" -- misses the mark. His conclusion that major reforms are not essential to the pension system runs against the grain of main stream professional thinking.

Mr. Langer ignores months of intensive analysis of the issues by the Task Force established by Secretary of Labor Robert Reich, a group of experts with broad economic and social responsibilities going well beyond the pension perspective. The Task Force reached out to experts and a broad range of industry and union groups. In all, 77 appeared. Virtually all agreed pension underfunding presents a long-term problem and significant reforms are needed.

Mr. Langer's comments on the PBGC deficit are out of step with generally accepted accounting approaches. He contends the PBGC's $2.7 billion deficit is misleading because it includes "probable net claims," meaning claims the PBGC is likely to assume from plan expected to terminate because the sponsor is in financial difficulty. Good accounting practices require the inclusion of "probable claims" because they can be expected to occur in the near term. Indeed, the Government Accounting Office confirmed the validity of the deficit figure with probable claims in its audit of the financial statements of the PBGC for 1992.

Nor can the serious level of underfunding be downplayed. Underfunding has been steadily increasing. It went from $27 billion in 1987 to $38 billion in 1991 and is expected to climb to over

$50 billion when the 1992 figure is reported. If anything, the underfunding figures are on the conservative side. Historically, we have found that as a plan moves closer to termination, the underfunding grows. As Mr. Langer points out, underfunding is subject to interest-rate fluctuations and rising rates could reduce underfunding, but there can also be periods when interest rates fall again and underfunding increases. All that means is that the economy can go up and down, and we should take the steps necessary to stabilize the situation now so that pension plan participants and the PBGC are better insulated from those ups and downs.

Interest rates are not the only factor in increased underfunding. Many companies simply have not funded their plans adequately. Between 1989 through 1991, 40% of the underfunded plans sponsored by the companies with the greatest underfunding did not even meet the interest due on underfunded liabilities.

We do agree with Mr. Langer's statement that the PBGC situation is still manageable. The solution, however, is not for us to watch the problem grow. The better wisdom is to address the problem while it is still manageable, with strong but measured reforms.

The Clinton administration has come up with a good legislative reform package that goes to the heart of the PBGC's problem: underfunded plans. The reforms represent a firm, yet balanced approach to underfunding and to assuring benefit security for workers and retirees. They will markedly increase funding in the most underfunded plans and will do so in a reasonable way.

Copyright 1994 Crain Communications, Inc., Pensions & Investments, March 7, 1994
Reproduced with permission.

Letter to the Editor: PBGC reforms

By David Langer, David Langer Co. Inc., New York

In the March 7 Letters to the Editor, Martin Slate, executive director of the Pension Benefit Guaranty Corp., misstates the conclusion of my Dec. 13 commentary. I did not write, as Mr. Slate states in his letter, that "major reforms are not essential to the pension system." I stated that "Secretary Reich and his task force have not made their case for the adoption of their proposals to raise either premiums or sponsor contributions," and added there was merit in proposals that will create greater equity among sponsors by minimizing additional large claims. Far from ignoring the task force's analysis, I asserted the proposals would "impose an unnecessary and harmful overlay of additional complexity on pension law and regulation."

Mr. Slate, surprisingly, had little to say about my detailed financial analysis, which led me to conclude the PBGC is in sound financial condition. I noted the following: the size and trend of PBGC's deficit do not support Secretary Reich's statement that the deficit poses a threat to the PBGC, the declared $45 billion of underfunding in ongoing plans is not a shadowy menance, and the PBGC does not have the ability to project deficits meaningfully. I reported solid signs of financial health including, since 1985, a jump in net income and a vigorous increase in the ratio of assets to payout to $8.59 per $ 1, nearly triple the $3 level proposed for private plans by Secretary Reich and his task force.

With regard to the validity of the PBGC's addition of "probable net claims" to the deficit, I could not find in the GAO's report of its audit of the PBGC the confirmation by it of this practice as Mr. Slate claims. I understand such addition is not the practice of life and health insurers and may be open to question in any area where there is substantial anticipated income as is the case with the PBGC.

Since it is agreed there is not need for haste in reforming the PBGC, the opportunity then exists to screen proposals thoroughly to ensure that those adopted will -- in accordance with the PBGC's mandate under ERISA -- encourage the adoption of new plans, not discourage employers from continuing or improving their plans, and keep premiums at the lowest feasible level.

Copyright 1994 Crain Communications, Inc., Pensions & Investments, May 2, 1994
Reproduced with permission.