Letter to the Editor ¦ December 21, 1992
Response to PBGC officials

By David Langer

I am writing in response to letters published Nov. 9 from James B. Lockhart, executive director, Pension Benefit Guaranty Corp., and M.J. Mintz, chairman, PBGC advisory committee, who were responding to my two-part article critiquing PBGC in the Sept. 14 and 28 issues.

Mr. Mintz agrees that "the pension insurance program has severe problems," there is a need for corrective measures and "the absence of careful thought and planning in PBGC's design has proven highly damaging to both PBGC and the defined benefit system." Mr. Lockhart, on the other hand, offers criticisms that are totally unfounded. For example, he says I fail to mention PBGC's large and growing deficit and create a "distorted picture" of its financial condition using a cash flow approach. However, as any reader will readily note, I wrote the article because I am very much concerned about the deficit and also Mr. Lockhart's persistent scaremongering, which confuse and alarm people and malign by implication all plans, solvent or not.

With regard to PBGC's claimed $2.5 billion deficit, this is arrived at by simply netting current assets ($5.7 billion) and liabilities ($8.2 billion). Such method is a point-in-time snapshot, which thus omits both the present value of future premiums and future administrative expenses (although included are $776 million in probable but not yet realized liabilities). Annual premiums now total $790 million and annual expenses $71 million, with present values of more than $9 billion (Employee Benefit Research Institute's estimate) and $800 million respectively.

When these items are factored in, an estimated surplus results of $6.7 billion instead of a deficit of $2.5 billion, a positive swing of more than $9 billion. For the public to have a complete picture, it seems logical that the $6.7 billion surplus be Mr. Lockhart's starting point when he wishes to speculate on anticipated liability losses, since it also takes into account anticipated premium income and expenses. His letter cites future possible losses of both $13 billion and $30 billion to $45 billion but does not make clear their bases. Note too, that PBGC calculates its actuarial liabilities using interest rates that are at an all-time low and likely to rise. One would be interested in at least having available, when he asks us to contemplate PBGC's solvency status, the lower liability estimates that would result from higher interest rates.

My article presents the results of 16 years of cash flow in projecting assets because the technique provides a dynamic and easily understood view of the effect of the key variables on assets, particularly when there can be wide variations from year to year.

I am puzzled where Mr. Lockhart finds I argue in my article "it is better to hide PBGC's financial condition to fool sponsors into believing that the insurance program is sound." I assert rather it is he who would mislead the public into believing the program is terribly unsound and in danger of imminent collapse if his proposals are not adopted by Congress. I noted that a deficit in cash flow does not appear likely for at least ten years, leaving ample time for corrective measures to be studied and implemented when needed. I also did not "complain about recent premium increases," but that PBGC premiums have been rising 20% per year since 1974 and this is alienating sponsors.

I observed that PBGC does not place actuaries at its most significant levels of authority despite PBGC's serious risk evaluation problems. Mr. Lockhart states I am wrong because two senior actuaries "are supported by 41 actuaries." This is not responsive to my point, given their limited authority. Also, since PBGC had but seven actuaries a year ago, the credentials of the 36 new actuaries become of interest.

My article pointed out that the General Accounting Office has never been able to express an opinion on PBGC's financial statements because of "significant internal control and systems weaknesses" and the GAO states continuing problems with PBGC's premium collection system also prevent an accurate accounting of premium revenue (and have resulted in substantial premium losses). Mr. Lockhart chose not to write about this. Mr. Mintz believes that credit is due PBGC for calling in the GAO "to address its long-standing problems." Still, why has this deplorable condition persisted for so long? One has to ask why putting internal operations in order was not a priority for Mr. Lockhart when he became executive director in 1989 (ditto his predecessors), and the role the advisory committee has played.

Messrs. Lockhart and Mintz chide me for not commenting on the Bush administration proposals. The primary intent of the article, however, while focusing on the PBGC, was to demonstrate the need for a thorough re-evaluation of ERISA -- given the damage that excessive complexity and the ill-conceived PBGC have done to what was a successful defined benefit plan system prior to ERISA's inception in 1974. The article did suggest, though, constructive approaches that could be adopted by Mr. Lockhart. I continue to urge him to heed PBGC's mandated purpose to encourage the existence of defined benefit plans, which purpose he acknowledges but does not conspicuously practice.

- David Langer, a consulting actuary and president of David Langer Co., Inc.
New York

Copyright 1992 Crain Communications, Inc. Pensions & Investments, December 21, 1992 Reproduced with permission.