Pension Benefit Guaranty Corporation

April 6, 2005

Impact on Contributions, 

Funded Ratios, and Claims 

Against the Pension Insurance Program

of the Administration’s 

Pension Reform Proposal
Impact on Contributions, Funded Ratios,

and Claims against the Pension Insurance Program

of the Administration’s Pension Reform Proposal

Introduction

This paper reports the results of a series of simulations of the effects that the 

Administration’s single-employer defined benefit pension funding reform proposal 

and current law will have on the future values of three key variables in the singleemployer pension system: required minimum contributions, plan funding levels and 

claims against the pension insurance program. 

The results of simulations for a number of economic scenarios are presented. The 

scenarios discussed in this paper were chosen to reflect the performance of the 

proposal over a wide range of generic economic conditions. None of the scenarios 

should be considered predictions or forecasts of future economic performance. 

Additionally, the program used to develop these simulations keeps the population 

of defined benefit pension plans and the active participants in those plans roughly 

constant over time. For these reasons, the results discussed in the paper are not 

directly comparable to results that might be generated by analyzing the proposal’s 

effects under any specific forecast of future economic conditions or path of defined 

benefit pension plan participation. 

All simulations cover the 10-year period from 2006 through 2015 for the 

single-employer system as a whole and do not attempt to measure the effects of 

either the proposal or current law on individual pension plans or specific industries. 

The analysis suggests that under the scenarios analyzed plan funding and 

contributions will be higher and claims will be lower if the proposal is enacted than 

will be the case if current funding rules remain in place.

The results in this paper reflect only how the proposed funding rules affect the 

pension system under an assumption that plan sponsors continue to behave as 

they do under current law. For modeling purposes, sponsors are assumed to make 

minimum required contributions each year. These results do not reflect the effects 

of some critical components of the proposal including the direct and incentive effects 

of benefit restrictions and the incentive effects of the proposed system of PBGC 

premiums. The proposal provides plan sponsors with both the tools and incentives 

to smooth contributions by funding above the minimum during good times. 

Projected minimum contributions do not reflect this behavior—that is, sponsors are 

not assumed to take advantage of new rules that allow sponsors to build funding 

cushions in good economic times. The paper does discuss a stylized example of 

how a representative sponsor might use these rules to make the path of required 

contributions less volatile over time.

1
Pension Funding Has Been Inadequate

Many single-employer defined benefit pension plans are seriously underfunded, 

a situation that threatens the long-term viability of the pension system if not 

corrected. Total underfunding in the system is currently estimated to exceed $450 

billion. A number of large pension plans have terminated in recent years with 

significant underfunding of promised pensions resulting in a precipitous decline in 

the net position of the single-employer insurance program. The program, which had 

a $7.7 billion surplus in 2001, had a $23.3 billion deficit at the end of 2004. 

Plan terminations often have serious consequences for plan participants. For 

example, Bethlehem Steel’s plan had only about $3.5 billion in assets to cover 

almost $8 billion of promised benefits when it terminated. While the insurance 

system will pay for almost $4 billion in unfunded benefits, Bethlehem retirees will 

receive half a billion dollars less in benefits than promised because of the legal 

limits of PBGC’s guarantee. Some participants will receive less than half of their 

promised benefit. 

If plan underfunding and large claims against the insurance program are allowed to 

persist, the burden on remaining plan sponsors, whose premiums are the primary 

source of revenue to pay unfunded benefits, will continue to increase. If that burden 

becomes too great, sponsors may ask the Congress to authorize a bailout of the 

system by U.S. taxpayers. 

The Administration’s Proposal to Reform Pension Funding

The Administration’s pension proposal is designed to protect participant’s benefits 

and improve the position of the insurance program by providing better incentives 

for sponsors to maintain responsible funding than exist under current law. Pension 

underfunding is more than $450 billion notwithstanding compliance of plan 

sponsors with current funding rules—a testament to the need for reform. Current 

funding rules are simply inadequate to ensure proper funding of pension promises. 

The proposal will reduce the chances that future retirees will suffer losses in earned 

pension benefits and will restore the health of the pension insurance program. 

These goals will be accomplished by correcting structural flaws in the funding rules. 

Key features of the proposal include provisions that will:

● Measure plan assets and liabilities accurately.

● Ensure adequate funding by establishing funding targets that equal the full 

value of accrued benefits.

2
● Increase limits on deductible contributions in order to allow sufficient 

advance funding by plans in good economic times, to reduce substantial 

increases in minimum required contributions in bad economic times.

● Reduce moral hazard by restricting financially troubled companies with 

underfunded plans from making new benefit promises they cannot keep.

● Reform PBGC premiums so that they better reflect a plan’s risk and ensure 

the pension insurance system’s financial solvency.

For a detailed description of the Administration’s pension reform proposal, see the 

Department of Labor’s Web site at www.dol.gov/ebsa/pdf/SEPproposal2.pdf.

Methodology

This paper compares the impact of current law and the Administration’s funding 

reform proposal on minimum contribution requirements, funded ratios, and 

expected claims against the pension insurance program. Comparative results are 

shown for a “baseline economy” (an economy where interest rates, equity returns, 

and other variables are set at approximately their historical averages), for the 

type of economy that prevailed from 1995 through 2004 (which in its latter years 

included the “perfect storm” of low interest rates and declining equity values), and 

500 scenarios chosen at random using a stochastic modeling approach. 

The analysis was performed using the PBGC’s Pension Insurance Modeling System 

(PIMS). PIMS has a database with detailed information on about 400 actual 

pension plans, sponsored by nearly 300 firms. These plans represent about 50 

percent of the liabilities and underfunding in the defined benefit system. The model 

projects various economic scenarios over the 10-year period from 2006 through 

2015 and measures the impact of each scenario on the plans in the database for 

each year of the 10-year period. Some of these economic scenarios are deterministic, 

with interest rates, equity returns, and other variables set to mimic a particular 

economic period (such as the 1995 through 2004 period). Some of the scenarios 

are stochastic, with interest rates, equity returns, and other variables allowed to 

fluctuate randomly (within certain bounds based on historical experience). In both 

the deterministic and stochastic scenarios, PIMS extrapolates the results of the 

simulations to the universe of single-employer plans.

The PIMS model is not predictive. That is, it does not provide a single best estimate 

of future events. When used in a stochastic mode, PIMS provides a range of possible 

future outcomes and quantifies the likelihood of these outcomes. As noted above, 

these results do not reflect the effects of some critical components of the proposal, 

including the incentives provided by the proposal to encourage better funding. Plan 

sponsors may choose to make additional contributions to avoid benefit restrictions 

or to avoid the proposed higher PBGC premiums. 

3
More general behavioral responses to either economic conditions or the proposal 

are also not incorporated. Thus, for example, the modeling does not incorporate the 

possibility that companies in a single industry will seek to terminate their plans in 

response to the termination of their competitors’ plans. The analytical methodology 

and assumptions used in the modeling are described more fully in the appendix 

to this paper. Additional information about PIMS is in the Pension Insurance 

Data Book (1998), page 10, available on the PBGC’s Web site at: www.pbgc.gov/

publications/databook/databk98.pdf.

Summary of Findings

The results of the comparative funding analysis are set forth in the charts below. 

In sum, the charts show that the Administration proposal will produce stronger 

pension funding than current law, reduce losses to participants and the pension 

insurance program, and permit a smoother pattern of contributions:

Greater contributions into plans. 

● Overall minimum contributions paid to single-employer plans will increase 

compared to current law because of the higher funding targets and 

elimination of the “full funding limitation” and credit balances. 

● Higher deductible contribution limits will enable sponsors to build up a 

funding “cushion” during good times to minimize contributions during bad 

times.

Improved funded ratios. 

● Funded ratios (plan assets divided by plan liabilities, computed on a 

termination basis) improve compared to current law because of the higher 

contributions required under the proposal.

● In a baseline economy, funded ratios improve steadily under the proposal, 

reaching approximately 95 percent of termination liability by the end of the 

10-year period. Under current law, funded ratios reach only about 80 percent 

of termination liability.

● In a “perfect storm” economy, funded ratios remain higher under the proposal 

than under current law in both bad years and good years. Importantly, our 

analysis suggests that the higher deductible contribution limits will enable 

sponsors to build up a funding “cushion” during good times to minimize 

contributions during bad times.

4
Reduced termination insurance claims. 

● Average claims against the pension insurance system are significantly lower 

under the proposal. Losses by participants would be correspondingly lower, 

as well.

● In 95 percent of the economic scenarios run by the model in the stochastic 

mode, losses are lower under the funding proposal than under current law.

Results of the Economic Modeling

Baseline economy

Charts 1, 2, 5, and 7 below compare the effect of the funding proposal on 

contributions and funded ratios in a hypothetical “baseline economy.” The 

baseline economy scenario is a deterministic run that uses fixed values for 

variables such as long-term Treasury rates and equity returns. These values 

are the medians of their historical values, held constant over the entire 10-

year period.

Charts 3, 4, 6, and 8 illustrate the effect of the Administration funding 

proposal on claims against the pension insurance program under a wide 

range of economic scenarios. Each of these charts is based on a stochastic 

modeling of 500 possible economic scenarios over the same 10-year period, 

2006 through 2015. The median economic assumptions under the stochastic 

model are consistent with the assumptions used in the deterministic baseline 

economy. (See the Appendix to this paper for more detail.) 

Aggregate effects

Chart 1 shows the aggregate amount of required pension contributions for 

each year through 2015, assuming the Administration proposal becomes 

effective in 2006. The “current law” projections assume that the current 

liability interest rate will revert to the 30-year Treasury rate after the end of 

2005, which will occur if no pension legislation passes the Congress this year. 

All slides that depict estimated future claims and contributions express those 

amounts not in dollar terms but as index numbers. The base of the index is 

the estimated level of contributions or claims in 2005, as appropriate, under 

current law. 

5
For comparative purposes, projections are also shown assuming the basis for 

the current liability interest rate remains the long term corporate bond rate, 

as defined by the Pension Funding Equity Act of 2004. 

Contributions are higher under the Administration proposal over the 2006 

to 2012 period, after which contributions under current law and the proposal 

converge. The higher levels of annual contributions reflect the generally 

higher funding targets included in the Administration proposal. Another 

driver of the higher contributions is that, under the proposal, funding deficits 

relative to the new funding targets that exist on the date of enactment will be 

amortized over seven years. 

Chart 1. Under the Proposal, Required Contributions Continue Until Accrued Benefits 

Are Funded

The effect of increased contributions required under the funding proposal is 

illustrated by Chart 2. This chart shows the aggregate projected funded ratio 

(total assets divided by total liabilities, measured on a termination basis1) 

through 2015. Under the proposal, the ratio climbs steadily and reaches 

about 95 percent of termination liability by the end of the 10-year period. 

Under current law the average funded ratio flattens out after two years and 

never gets much above 80 percent of termination liability. This illustrates one 

of the major problems with current law—required contributions level off well 

before a plan is adequately funded. 

1

 “Termination basis” means assets at fair market value and liabilities measured using PBGC’s methodology for valuing 

the liabilities of an underfunded, terminated plan taken over by the PBGC. The PBGC’s methodology is market-based: the 

agency conducts surveys of the prices charged by private-sector insurance companies to write group annuity contracts, and 

sets its assumptions to match those prices. Thus, termination liability equals the cost of paying a private insurer to provide 

the promised benefits. If plan funding is less than 100 percent of termination liability, participants may lose benefits. 

6

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

350

300

250

200

150

100

50

0

index – 100 represents 2005 contributions

Projected Contributions All Plans

Baseline Economy
Chart 2. Current Rules Do Not Lead to Better-Funded Plans—The Funding Proposal 

Improves Funded Ratios Over Time

Chart 3 shows—under the proposal and under current law—the mean claims 

against the pension insurance program from the 500 randomly chosen 

economic scenarios under the stochastic modeling.2 Claims represent the 

amount of underfunding in terminated plans that would be guaranteed by 

the PBGC. (Of course, as discussed above, participants in underfunded plans 

also often suffer major losses in their pension benefits upon termination due 

to statutory limits on PBGC’s guarantee.)

Chart 3. Better Funded Plans Reduce Losses to Participants and Burden on Premium 

Payers

2

 Stochastic, rather then deterministic, modeling is used to show expected claims because a deterministic simulation of 

claims has inherent shortcomings and biases that could make the analysis unreliable. 

7

 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

130%

120%

110%

100%

90%

80%

70%

60%

50%

Funded Ratio (termination basis at yearend)

Baseline Economy

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

All Plans

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

120

100

80

60

40

20

index – 100 represents 2005 total claims

0

Claims against the pension insurance program

Mean of 500 scenarios under stochastic model

All Plans
As Chart 3 shows, the average amount of claims is much lower under the 

funding proposal than under current law, with the gap increasing over the 

10-year period. This is not surprising, in view of the earlier charts, which 

show the proposal producing better plan funding. Better funded plans are 

less likely to terminate in a distress or involuntary termination and, even if 

they do, the funding shortfall will be less.

Chart 4 illustrates the same point in a slightly different way. Whereas Chart 

3 shows the average amount of claims under the 500 hypothetical scenarios, 

Chart 4 shows whether, in each scenario, the funding proposal (represented 

by the blue diamonds) or current law (represented by the pink squares) 

results in lower claims against the pension insurance program. These points 

are mapped on a graph showing the average 30-year Treasury bond yield on 

the vertical axis and the average equity return on the horizontal axis for each 

scenario. 

Chart 4 demonstrates that losses are lower under the funding proposal 

under a wide range of economic conditions. In the simulation, losses were 

lower under the proposal for 95 percent of the simulations (477 of 500). The 

few scenarios in which the proposal results in higher claims (23 of 500) were 

almost all scenarios characterized by rising interest rates. 

Chart 4. The Proposal Results in Lower Losses in 95% of the Scenarios Modeled

8

10%

8%

6%

4%

2%

Average 30-Year Yield

Median Equity Return 9.4%

Median 30-Year Yield 5.2%

◆ Funding Proposal ● Current Law w/ Corporate Bond Forever

 -15% -5% 5% 15% 25% 35%

Average Equity Return (nominal)

All Plans

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Effects on at-risk plans in a baseline economy

The Administration proposal sets the funding target for plans of investment 

grade companies as “ongoing” liability and for plans of non-investment grade 

companies as “at-risk” liability. “At-risk” liability is generally higher than 

“ongoing” liability because the at-risk assumptions reflect the higher risk of 

plan termination for plans sponsored by non-investment grade companies.3 

The effect of increased contributions required to be made by non-investment 

grade plan sponsors is illustrated in Chart 5. This chart shows the projected 

funded ratio (total assets divided by total liabilities, measured on an “at-risk” 

basis) through 2015. Under the proposal, the funded ratio for at-risk plans 

climbs steadily and reaches just over 100 percent of at-risk liability by the 

end of the 10-year period. (In these simulations, because assets are assumed 

to earn a higher rate of return than the rate used to discount liabilities, 

funding will slightly exceed 100 percent.) 

Chart 5. The Proposal Improves Funded Ratios for “At-Risk” Plans

Like Chart 3, Chart 6 shows the mean claims against the pension insurance 

program from the 500 randomly chosen economic scenarios under the 

stochastic modeling, but only for “at-risk” plans. Claims represent the 

amount of underfunding in terminated at-risk plans that would be 

guaranteed by the PBGC. The chart shows that the proposal is effective in 

reducing claims from at-risk plans.

9

At-Risk Plans (Funding Proposal)

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

130%

120%

110%

100%

90%

80%

70%

60%

50%

At-Risk Plans Funded Ratio (at-risk basis at yearend)

Baseline Economy

3

 Information about these liability measures and the standards for investment and non-investment grade status is in the 

Administration’s Pension Reform Proposal, which is located on the Departmernt of Labor’s Web site at: www.dol.gov/

ebsa/pdf/SEPproposal2.pdf.
Chart 6. Losses From “At-Risk” Plans Will Be Reduced Significantly Under the Proposal

Effects on ongoing plans—baseline economy

The effect of increased contributions required by investment grade plan 

sponsors is illustrated in Chart 7. This chart illustrates the projected funded 

ratio (total assets divided by total liabilities, measured on an “ongoing” basis) 

through 2015. Under the proposal, the funded ratio for ongoing plans climbs 

steadily and reaches about 100 percent of ongoing liability by the end of the 

10-year period. 

Chart 7. The Proposal Improves Funded Ratios for “Ongoing” Plans

10

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

120

100

80

60

40

20

index – 100 represents 2005 claims

0

Claims against the pension insurance program

Mean of 500 scenarios under stochastic model

At-Risk Plans

Ongoing Plans (Funding Proposal)

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

130%

120%

110%

100%

90%

80%

70%

60%

50%

Ongoing Plans Funded Ratio (ongoing basis at yearend)

Baseline Economy
Like Charts 3 and 6, Chart 8 shows the mean claims against the pension 

insurance program from the 500 randomly chosen economic scenarios under 

the stochastic modeling, but only for “ongoing” plans. Claims represent 

the amount of underfunding in terminated ongoing plans that would be 

guaranteed by the PBGC. The proposal is successful in reducing claims 

significantly from “ongoing” plans as well as from “at risk” plans.

Chart 8. Losses From “Ongoing” Plans Will Be Reduced Under the Proposal

Perfect storm economy—the 1995 to 2004 period

Charts 9 and 10 compare the effects of the Administration proposal to current 

law on minimum contributions and funded ratios based on a hypothetical 

economy closely resembling the 1995-2004 economy.4 The latter years of the 

1995-2004 economy have often been described as creating a “perfect storm” 

for pension plans because of the combination of a reduction in plan assets due 

to the stock market decline and a simultaneous increase in plan liabilities 

due to declining interest rates.

Chart 9 shows that contributions to plans in this kind of “perfect storm” 

economy would be higher under the Administration proposal than under 

current law. This reflects that under current law both plan assets and plan 

liabilities are “smoothed,” which masks and delays needed funding. Under 

the proposal, a plan’s funding target and assets are determined on a market 

basis, resulting in timely and accurate plan funding.

11

index – 100 represents 2005 claims

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

120

100

80

60

40

20

0

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

Claims against the pension insurance program

Mean of 500 scenarios under stochastic model Ongoing Plans

4

 The hypothetical economy is not exactly the same as the 1995-2004 economy because the model takes into account economic 

realities as of 2006 (such as then-prevailing interest rates) and then recreates the same economic pattern from the 1995-

2004 period. 
Chart 9. In a “Perfect Storm” Economy, Current Law Smoothing Leads to Weaker 

Funding

Chart 10 shows the beneficial effects of the proposal on funded ratios in a 

“perfect storm” economy. Although plan funded ratios decline significantly 

in this kind of an economy even under the proposal, the decline is much less 

severe, with funded ratios never falling below about 75 percent of termination 

liability. And the funded ratios recover to about 95 percent of termination 

liability within just three years under the proposal, whereas they remain 

below 80 percent under current law.

Chart 10.The Proposal Leads to Better-Funded Plans Even in a “Perfect Storm” Economy

12

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

350

300

250

200

150

100

50

0

index – 100 represents 2005 contributions

Projected Contributions

1995-2004 Economy

All Plans

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

130%

120%

110%

100%

90%

80%

70%

60%

50%

All Plans Funded Ratio (termination basis at yearend)

1995-2004 Economy

Funding Proposal Current Law w/ Corp Bond Forever 

Current Law
An important element of the Administration proposal is an increase in the 

amount of tax-deductible contributions that may be made to a plan. The 

proposal includes two funding “cushions.” The first allows funding of plans 

up to 130 percent of their funding target. The second cushion allows prefunding for salary and benefit increases. These funding cushions provide plan 

sponsors with a good deal of flexibility to contribute additional funds in good 

times so as to minimize the need to contribute in bad times.

As previously noted, PIMS and this analysis have not attempted to capture 

behavioral effects of the Administration proposal. Rather, the analysis has 

focused on minimum required contributions. Chart 11 provides a stylized 

example of how a plan sponsor might use the additional flexibility provided 

in our proposal to maintain smooth contributions. The chart shows how a 

plan sponsor could take advantage of the flexibility in the proposal to reduce 

the volatility of contributions in an economy similar to the “perfect storm” 

economy of 1995-2004.

The chart shows projected contributions over the 10-year period from 2006 

through 2015. The plan sponsor is assumed to contribute 25 percent above 

the required amount in 2006. In each subsequent year, contributions are 

assumed to be the greater of 98 percent of the prior year’s contribution or 

the minimum required amount. The chart shows that under the proposal 

sponsors are provided with the tools needed to make contributions less 

volatile and are given the choice of whether or not to use those tools. 

Chart 11. The Proposal Permits a Less Volatile Pattern of Contributions

13

Minimum Required Contributions

Less Volatile Contributions

 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

350

300

250

200

150

100

50

0

index – 100 represents 2005 contributions

Projected Contributions

1995-2004 Economy

All Plans
In addition to the “baseline economy” and the “perfect storm” economy, PBGC 

has modeled three additional economic scenarios that are not discussed in 

this paper: 1969-1978, the 1980s, and the 1990s. Under all of these scenarios, 

the funding proposal results in smaller losses to participants and the pension 

insurance program. 

Conclusion

The results of the simulations reported in this paper strongly suggest that the 

Administration’s single-employer defined benefit funding proposal will accomplish 

its primary goals of increasing the retirement security of defined benefit 

participants and decreasing losses to the pension insurance program. Stochastic 

modeling indicates that benefit losses and claims are much more likely to be 

lower under the proposal than under current law in a wide range of economic 

environments. 

14
Appendix

Modeling Methodology and Assumptions Used 

to Analyze the Administration’s Funding Proposal

Pension Insurance Modeling System Methodology

The analysis in this paper was performed using the PBGC’s Pension Insurance 

Modeling System (PIMS). PIMS has a detailed database of about 400 actual plans, 

sponsored by nearly 300 firms, which represent about 50 percent of liabilities 

and underfunding in the defined benefit system. The database includes the plan 

demographics, plan benefit structure, asset values by type, liabilities, and actuarial 

assumptions. It also includes key financial information about the employer 

sponsoring the plan. 

PIMS simulates contributions and underfunding for these plans using the minimum 

funding rules under the Administration’s proposal and current law, and then 

extrapolates the results to the universe of single-employer plans. It also uses the 

employer financial information as the starting point for assigning probabilities 

of bankruptcy, from which it projects losses to the insurance program under both 

current law and the funding proposal.

The PIMS model is not predictive. That is, it is not intended to provide a single best 

estimate of future events. It does not take into account possible incentive effects 

from the Administration’s proposal. For example, it does not take into account 

the possibility that plan sponsors will take advantage of the increased “cushions” 

that will allow them to make larger tax-deductible contributions in good years, or 

the possibility that they will make additional contributions to reduce their PBGC 

premiums. The model also does not incorporate behavioral responses to economic 

conditions, such as the possibility that companies in a single industry will seek to 

terminate their plans in response to the termination of their competitors’ plans.

Assumptions

The PIMS projections are performed in either a fixed path (deterministic) or random 

(stochastic) mode, and the assumptions depend on which mode is used. All results 

are in nominal dollars (not discounted to today’s value).

Deterministic runs (Charts 1, 2, 5, 7, 9, 10, and 11)

Projections of required contributions and funded ratios were made for a given 

economic scenario in a “non-random” or “deterministic” manner. 

15
● Interest rates, stock returns and related variables were set to a 

fixed path. For the “baseline” economy projections in Charts 1, 2, 5, 

and 7, interest rates and equity returns were set (approximately) 

to the medians of their historical values. Those rates, and other key 

parameters, were set as follows: 

 30-year Treasury yield 5.0%

 Equity return 9.0%

 Plans’ return on assets 6.9%

 Inflation 2.5%

 Wage and benefit growth 4.2%

● For Charts 9, 10, and 11, the deterministic economic assumptions 

shown above were replaced by a set of assumptions that followed the 

pattern of the 1995-2004 economy but were scaled to fit with PIMS 

starting values.

● Sponsor financial-health variables were fixed at their initial values.

● Plan asset allocations were fixed at mean values for all plans. 

● Plan demographics. The number of active participants was fixed at 

the initial value, but age and service varied depending on retirement 

and hiring assumptions. The number, age, and benefits of retired 

and terminated vested participants varied depending on mortality, 

separation and retirement assumptions.

Stochastic runs (Charts 3, 4, 6, and 8)

Projections of claims against the insurance program were made 

stochastically. In the stochastic (random) mode, PIMS provides a range of 

possible future outcomes and quantifies the likelihood of these outcomes. 

Claims against the pension insurance program were modeled by simulating 

the occurrence of bankruptcy for plan sponsors. The model reflects the 

historical relationship between the probability of bankruptcy and the firms’ 

financial-health variables (equity-to-debt ratio, cash flow, firm equity, and 

employment). For each period, the model assigns a random change in each 

of these variables to each firm correlated with changes in the economy. The 

simulated financial-health variables determine the probability of bankruptcy 

for that year. 

The model runs 500 economic scenarios (varying interest rates, equity 

returns, employment levels, bankruptcy probabilities, etc.) on the plans in the 

database for each year in the projection period. PIMS then extrapolates the 

results of these simulations to the universe of insured single-employer plans. 

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All the following variables were stochastically projected:

● Interest rates, stock returns and related variables (e.g., inflation and 

wage growth are determined by interest rates in PIMS).

● Sponsor financial-health variables (equity-to-debt ratio, cash flow, firm 

equity, and employment).

● Each plan’s asset allocation was randomly selected from a pool of 

allocations that reflects historic differences across plans in investment 

strategies. Each plan’s asset return also has a stochastic element that 

is uncorrelated with the simulated market rates and is uncorrelated 

across plans.

● Plan demographics. The number of active participants for a plan varied 

with its sponsor’s total employment level. Age and service also varied 

over time due to retirement and hiring assumptions. The number, 

age, and benefits of retired and terminated vested participants varied 

depending on mortality, separation and retirement assumptions.

● Sponsors were subjected to an annual stochastic chance of bankruptcy. 

A plan presented a loss to participants and/or the pension insurance 

program if its sponsor was simulated to experience bankruptcy and 

the plan was less than 80% funded for termination liability. Losses to 

the insurance program were calculated by averaging the losses in all 

simulations across all scenarios.

The most important variables in the stochastic simulations are stock 

returns and interest rates. Stock returns are independent from one period 

to the next. To determine a simulated sequence of stock returns, the model 

randomly draws returns that come from a distribution that reflects historical 

experience going back to 1926. Unlike stock returns, interest rates are 

correlated over time. With the model, the interest rate for a given period is 

expected to be equal to the interest rate for the prior period, plus or minus 

some random amount. The random draws affecting the bond yield and stock 

returns are correlated according to an historical estimate. Stock returns are 

more likely to be high when the bond yield is falling and vice versa. 

For further background on the PIMS methodology, see page 10 of the Pension 

Insurance Data Book 1998 on the PBGC’s Web site: www.pbgc.gov/

publications/databook/databk98.pdf. 

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Pension Benefit Guaranty Corporation

1200 K Street NW, Washington DC 20005-4026

www.pbgc.gov