PBGC Posts $34 Billion Deficit - Will Insurance Premiums Go Up?

The Pension Benefit Guaranty Corporation ("PBGC") has a challenging job that shows no sign of abating any time soon. In 100+ pages of its just released 2012 annual report, this federal corporation describes its various funding sources and the need for more flexibility. Announcing its largest ever deficit at $34 billion, PBGC management urges Congress to raise the insurance premiums that companies pay, preferably with those fees taking into account an employer's financial health and characteristics of a particular plan. Click to access the 2012 PBGC Annual Report.

In response to news of the increased funding gap, as quoted by Advisor One journalist Melanie Waddell, the head of the American Benefits Council, James Klein, cautions that [The public,] "should not be led to believe the PBGC is in danger of a bailout and Congress and the Obama Administration should not use this number as a pretext to raise premiums paid by pension plan sponsors." He adds that historically low interest rates have "overstated" pension fund liabilities for everyone, including the PBGC. See "PBGC Deficit Hits $34 Billion; Benefits Council Calls Number Misleading" (November 19, 2012). Last year, the same plaint was voiced by the American Benefits Council, the Business Roundtable, the ERISA Industry Committee and the U.S. Chamber of Commerce. In a joint statement entitled "PBGC Deficit: A Non-Event on the Horizon" (November 11, 2011), the 2011 funding gap was described as "a product of government-created artificially low interest rates[,]" due mainly to a fall in interest rates since late September 2008 that was meant to stimulate the U.S. economy.

As Dr. Susan Mangiero wrote in June 2006, there are many ways to measure pension funding status (and related concepts) and not all of the metrics and methodologies yield the same results. See "Will the Real Pension Deficit Please Stand Up?" (June 22, 2006). It is true that understanding what each number represents is a critical task. It is also true that important decisions should be made on the basis of full information, whether for the PBGC or U.S. corporate employers.

This brings to mind a recent discussion with a financial industry colleague about whether and to what extent the capital markets incorporate the "true" cost of a company's defined benefit plan liability. This is a topic that deserves its own blog post (or two or three) but suffice it to say that the economic obligation associated with a given employee benefit plan(s) is a hugely important issue for any participant, shareholder, creditor or policy-maker to evaluate.