Op-Ed ¦ September 28, 1992
Ill-conceived PBGC's damage to pensions

By David Langer

Second of two parts
A notable aspect of the Pension Benefit Guaranty Corp. is that it represents itself as being an insurer. The PBGC collects premiums and guarantees pension benefits, but it otherwise differs substantially from traditional insurers. It may not be possible, for instance, to measure the risks the PBGC has undertaken given all of the variables that need to be considered.

One needs to know the probability that a plan will terminate, the liability it will present to the PBGC for unfunded guaranteed benefits, the future flow of premiums and expenses and prospective legislation. Each of these items presents a distinct challenge.

The probability that a plan will present a claim depends on a company's management skills, the economy, the effect of technological change and so on. The benefit liability can be increased by plan liberalizations, salary increases (particularly in the period preceding termination), plant closings with enriched benefits and adoption of early retirement subsidies.

Plan assets assumed to be available to the PBGC to pay guaranteed benefits might be depleted by lump-sum payments, early retirement windows, failure to make required contributions and investment losses. In a bankruptcy, the PBGC might have to compete with other creditors for corporate assets to pay an unfunded liability. Future premium collections depend on many factors, including premium increases mandated by Congress.

Furthermore, unlike commercial insurers, the PBGC has no competitors, pays no dividends, and its captive "policyholders" have to go through the annual expense of making a special actuarial calculation to compute their own premiums. A rather long stretch is needed to reach the conclusion that the PBGC resembles a traditional insurer.

The PBGC also alienates existing and potential defined benefit plan sponsors in the following ways:

• The PBGC premium has risen about 20% per year, from $ 1 per participant in 1974 to the current $ 19 per participant plus up to $ 53 more based on the amount of the unfunded liability.

• The PBGC executive director frequently uses scare tactics to proclaim the potential high liabilities the pension insurance agency might have to take on, with the related possibility of an enormous premium increase.

• The PBGC annually publishes the names of the plans with the 50 largest unfunded liabilities with the erroneous implication the PBGC soon might have to assume them.

• The sponsor's ability to terminate a plan might be limited if it is not bankrupt, and the sponsor must also pay a high cost to terminate a plan.

No role for the actuary
Given the severe risk evaluation problems of the PBGC, it is puzzling that actuaries never have held significant positions of authority with it. At the inception of the Employee Retirement Income Security Act of 1974, a superficial calculation that indicated a low cost for termination insurance was used to justify the $ 1 premium. Actuaries, and knowledgeable non-actuaries, who urged precautionary measures were ignored; no actuary was appointed to the PBGC's original advisory council. The PBGC's 1991 annual report reveals not a single actuary among the 24 senior-level persons comprising its board of directors, executive management and department heads. One of the seven advisory committee members is an actuary, but curiously plays no role as an actuarial adviser.

PBGC needs no S&L-type bailout
In a detailed analysis of the PBGC's financial condition, the Employee Benefit Research Institute, Washington, concluded there are adequate PBGC assets to cover benefits payable for the foreseeable future. This analysis rebuts the PBGC's dire warnings of impending insolvency and a savings and loan-type bailout. The accompanying chart projects the PBGC's assets on a cash-flow basis up to 2008 under three sets of assumptions. In the worst scenario, it may be noted, a deficit does not develop until 2003, leaving many years for corrective measures to be implemented, should they become necessary.

The EBRI report also warned against legislative changes that would cause plan sponsors to terminate their plans, leaving the PBGC with a diminished premium base. The warning should apply as well to frequent and complex regulatory changes.

Needed reforms
The discussions of how to strengthen the PBGC's financial underpinnings are customarily in terms of benefit limitations, the avoidance of liabilities not intended to be covered, and raising the premium and plan contribution levels. But reform also should focus on the first of the PBGC's three mandated purposes under Title IV of ERISA, namely, "to encourage the continuation and maintenance of voluntary pension plans for the benefit of their participants." While officials of the PBGC declare this to be their intention, there is little evidence of actual practice. To this end, the PBGC should begin to pursue a number of constructive approaches, among them:

• Accentuate the positive. Avoid the undue emphasis on the unfunded liability of single-employer plans. No S&L debacle is imminent and cash flow projections indicate no near-term problem. In the same vein, end the publication of the 50 plans with the largest unfunded liability, which suggests all of these plans -- and perhaps all other plans as well -- are financially unsound, which is true for some but not most. Instead, it should be stressed how well so many plans are working, despite the monumental handicaps imposed by the government. Court battles over the assets of bankrupt companies sour interest in defined benefit plans and thus need to be avoided.

• Promote helpful legislation. Join efforts to simplify laws and regulations to reduce employer costs and frustration. Encourage legislation to raise the full-funding limitation, to allow greater employer contributions when profits permit, and to do away with the penalty for contributions in excess of the limits.

• Give greater recognition to actuarial expertise. Actuaries who have the experience required to enable them to deal with the PBGC's unique actuarial problems need to be placed at the PBGC's topmost levels. Needed reflection on PBGC The time has come to reflect on the degree to which the PBGC has both succeeded and failed in its mission to protect defined benefit pensions. A key question is whether the entire population of actual and potential retired and active participants is better off as a result of the PBGC. One thus has to examine the benefits paid and the cost to employers of PBGC premiums and the expense of staff and professional help. It is necessary also to assess the magnitude of the loss of benefits that never had a chance to be generated because employers were turned off by cost and complexity and thus never started a plan, declined to improve benefits, or simply terminated their plans. Finally, the feelings of small-to medium-size plan sponsors toward their plans need to be explored. These sponsors have undoubtedly come to feel -- with justification -- that a deliberate effort has been made at the federal level to discourage the continuation of their defined benefit plans.

The future health of defined benefit plans is at stake. This assumes special importance with about half of the 80 million baby boomers approaching retirement age in the next 20 years, together with the realization that defined contribution plans aren't likely to provide adequate retirement benefits.

- David Langer is president and consulting actuary of David Langer Co. New York,
and chairman of the employee benefits committee of the Actuarial Society of
Greater New York.

Copyright 1992 Crain Communications, Inc., Pensions & Investments, September 28, 1992 Reproduced with permission.