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SECTION 14. THE PENSION BENEFIT

GUARANTY CORPORATION

CONTENTS

Explanation of the Corporation and Its Functions

Administration

Plan Termination Insurance

Plan Termination

Financial Condition of the PBGC

Overview

Claims from Underfunded Plans

Financing

Budgetary Treatment

Future Financial Status of the PBGC

Legislative History

Single-Employer Plans

Multiemployer Plan Insurance Program

EXPLANATION OF THE CORPORATION AND ITS

FUNCTIONS

The Pension Benefit Guaranty Corporation (PBGC) was established under title IV of the Employee Retirement Income Security

Act of 1974 (ERISA) (88 Stat. 829, Public Law 93–406) to insure

private pension beneficiaries against the complete loss of promised

benefits if their defined benefit pension plan is terminated without

adequate funding. The PBGC receives no funds from general tax

revenues. Operations are financed by insurance premiums set by

Congress and paid by sponsors of defined benefit plans, investment

income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the trusteed plans.

ADMINISTRATION

The PBGC is a government-owned corporation. A three-member

board of directors, chaired by the Secretary of Labor, administers

the Corporation. The Secretary of Commerce and the Secretary of

the Treasury are the other directors. ERISA provides for a sevenmember Advisory Committee, appointed by the President, for staggered 3 year terms. The Advisory Committee advises the PBGC on

issues such as the appointment of trustees in termination proceedings, investment of funds, plan liquidations, and other matters.

PLAN TERMINATION INSURANCE

Defined benefit and defined contribution plans

There are two basic kinds of pension plans: ‘‘defined benefit’’ and

‘‘defined contribution’’ plans. Under a defined benefit plan, employVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 00845 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.014 WAYS3 PsN: WAYS3
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ees receive a fixed benefit at retirement prescribed by a formula set

forth in the plan. The employer makes annual contributions to the

plan based on actuarial calculations designed to ensure that the

plan has sufficient funds to pay the benefit prescribed by the formula. Under a defined contribution plan, no particular benefit is

promised. Instead, benefits are based on the balance of an individual account maintained for the benefit of the employee. The benefit

received by an employee at retirement is generally dependent on

two factors: total contributions made to the plan on the employee’s

behalf during the employee’s participation in the plan, and the investment experience of the amounts contributed on the employee’s

behalf. Under either type of pension plan, employees may also be

permitted to make contributions.

Under a defined contribution plan, the employee bears all the

risk of poor investment performance of the assets invested in a

plan. Whether the funds are invested well or poorly, the employee

gets at retirement only what was contributed plus the amount actually earned.

Under a defined benefit plan, the employer bears more of the

risk of loss. The Internal Revenue Code and ERISA contain minimum funding standards that require the employer to make contributions to a defined benefit plan to fund promised benefits.

Thus, for example, if the plan experiences poor investment performance, actuarial miscalculations, or low benefit estimates, the

employer will be required to make additional contributions to the

plan. However, the minimum funding rules provide for funding

over a period of time, and do not require that the plan have assets

to pay all the benefits earned under the plan at any particular

time. Thus, it is possible for a defined benefit plan to terminate

without having sufficient assets to pay promised benefits. The

PBGC insures defined benefit plan benefits up to certain limits to

protect plan participants in the event of such a termination. However, the PBGC may not protect all benefits promised under a plan

so that even under a defined benefit plan, the employees bear some

risk of loss.

Defined benefit plans are fewer in number than defined contribution plans, but cover about the same number of participants. Defined benefit pension plans account for about 10 percent of all pension plans, but are the primary form of coverage for about half of

all pension participants.

The PBGC insures benefits only under certain defined benefit

plans and only up to certain monthly amounts. Private defined

benefit pension plans insured by the PBGC continue to be well

funded in general, with more than $1.43 trillion in assets, exceeding liability by $32 billion as of the beginning of 1996. However,

PBGC faces direct exposure from underfunded plans. PBGC reported $83 billion in pension underfunding in single-employer

plans as of the beginning of 1996. Underfunding in multiemployer

plans, as of January 1, 1996 (the most recent publicly available information) totaled $40.0 billion. The operations of the insurance

program, and insurance limits, are described below. Defined contribution plans are not insured by the PBGC.

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Single-employer and multiemployer plans

Defined benefit plans insured by the PBGC fall into two categories: single-employer plans and multiemployer plans. Multiemployer plans are collectively bargained arrangements maintained

by more than one employer. Single-employer plans, whether or not

collectively bargained, are each maintained by one employer. Noncollectively-bargained plans maintained by more than one employer

are classified as single-employer plans.

The risk to the PBGC posed by single-employer plans is different

from that posed by multiemployer plans. Generally, singleemployer plans are more vulnerable to the risk of underfunding

due to financial weakness of the sponsoring employer; the PBGC

is more vulnerable to the risk that a single employer will be unable

to make up the difference between funded and promised benefits.

Issues concerning insurance of multiemployer plans are more likely

to concern the allocation of liabilities as firms enter and leave the

participating group.

The PBGC insures the benefits of 42 million pension plan participants, including active workers and retirees. Of these, 79 percent,

or about 33 million, are covered by approximately 42,000 singleemployer pension plans, and 21 percent, or about 8.8 million, are

covered by approximately 2,000 multiemployer plans.

Other requirements for PBGC coverage

The PBGC covers only those defined benefit plans that meet the

qualification requirements of section 401 of the Internal Revenue

Code. These are also the requirements that plans must meet in

order to receive the significant tax benefits available to qualified

pension plans.

Generally, to be qualified under the Internal Revenue Code, a

pension plan must be established with the intent of being a permanent and continuing arrangement; must provide definitely determinable benefits; may not discriminate in favor of highly compensated employees with respect to coverage, contributions or benefits; and must cover a minimum number or percentage of employees.

Pension plans specifically excluded from insurance by the PBGC

include government and church plans, defined contribution plans,

plans of fraternal societies financed entirely by member contributions, plans maintained by certain professionals with 25 or fewer

participants, and plans established and maintained exclusively for

substantial owners.

PLAN TERMINATION

Single-employer plans

An employer can voluntarily terminate a single-employer plan

only in a standard or distress termination. The participants and

the PBGC must be notified of the termination. The PBGC may involuntarily terminate a plan.

Standard terminations.—A standard termination is permitted

only if plan assets are sufficient to cover benefit liabilities. Generally, benefit liabilities equal all benefits earned to date by plan

participants, including vested and nonvested benefits (which autoVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 00847 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.014 WAYS3 PsN: WAYS3
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matically become vested at the time of termination), and including

certain early retirement supplements and subsidies. Benefit liabilities may also include certain contingent benefits (for example,

plant shutdown benefits). If assets are sufficient to cover benefit liabilities (and other termination requirements, such as notice to employees, have not been violated), the plan distributes benefits to

participants. The plan provides for the benefit payments it owes by

purchasing annuity contracts from an insurance company, or otherwise providing for the payment of benefits, for example, by providing the benefits in lump sum distributions.

Assets in excess of the amounts necessary to cover benefit liabilities may be recovered by the employer in an asset reversion. The

asset reversion is included in the gross income of the employer and

is also subject to a nondeductible excise tax. The excise tax is 20

percent of the amount of the reversion if the employer establishes

a qualified replacement plan, or provides certain benefit increases

in connection with the termination. Otherwise, the excise tax is 50

percent of the reversion amount.

Distress terminations.—If assets in the plan are not sufficient to

cover benefit liabilities, the employer may not terminate the plan

unless the employer meets one of four criteria necessary for a ‘‘distress’’ termination:

—The contributing sponsor, and every member of the controlled

group of which the sponsor is a member, is being liquidated in

bankruptcy or any similar Federal law or other similar State

insolvency proceedings;

—The contributing sponsor and every member of the sponsor’s

controlled group is being reorganized in bankruptcy or similar

State proceeding;

—The PBGC determines that termination is necessary to allow

the employer to pay its debts when due; or

—The PBGC determines that termination is necessary to avoid

unreasonably burdensome pension costs caused solely by a decline in the employer’s work force.

These requirements, added by the Single Employer Pension Plan

Amendments Act of 1986 (SEPPAA) and modified by the Pension

Protection Act of 1987 (PPA), and the Retirement Protection Act of

1994 (RPA) are designed to ensure that the liabilities of an underfunded plan remain the responsibility of the employer, rather than

the PBGC, unless the employer meets strict standards of financial

need indicating genuine inability to continue funding the plan.

Involuntary terminations.—In order to terminate a plan involuntarily, the PBGC must obtain a court order. The PBGC may institute court proceedings only if the plan in question has not met the

minimum funding standards, will be unable to pay benefits when

due, has a substantial owner who has received a distribution greater than $10,000 (other than by reason of death), or may create liability for the PBGC if the plan is not terminated. The PBGC must

terminate a plan if the plan is unable to pay benefits that are currently due. A court may order termination of the plan in order to

protect the interests of participants, to avoid unreasonable deterioration of the plan’s financial condition, or to avoid an unreasonable

increase in the PBGC liability under the plan.

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PBGC trusteeship.—When an underfunded plan terminates in a

distress or involuntary termination, the plan effectively goes into

PBGC receivership. The PBGC becomes the trustee of the plan,

takes control of any plan assets, and assumes responsibility for liabilities under the plan. The PBGC makes payments for benefit liabilities promised under the plan with assets received from two

sources: assets in the plan before termination, and assets recovered

from employers. The balance, if any, of guaranteed benefits owed

to beneficiaries is paid from the PBGC’s revolving funds (see

below).

Employer liability to the PBGC.—Following a distress or involuntary termination, the plan’s contributing sponsor and every member of that sponsor’s controlled group is liable to the PBGC for the

excess of the value of the plan’s liabilities as of the date of plan

termination over the fair market value of the plan’s assets on the

date of termination. The liability is joint and several, meaning that

each member of the controlled group can be held responsible for the

entire liability. Generally, the obligation is payable in cash or negotiable securities to the PBGC on the date of termination. Failure

to pay this amount upon demand by the PBGC may trigger a lien

on the property of the contributing employer’s controlled group for

up to 30 percent of its net worth. Obligations in excess of this

amount are to be paid on commercially reasonable terms acceptable

to the PBGC.

Benefit payments.—When an underfunded plan terminates, the

benefits that the PBGC will pay depend on the statutory guaranty,

asset allocation, and recovery on the PBGC’s employer liability

claim.

Guaranteed benefits.—Within certain limits, the PBGC guarantees any retirement benefit that was nonforfeitable (vested) on the

date of plan termination other than benefits that vest solely on account of the termination, and any death, survivor or disability benefit that was owed or was in payment status at the date of plan

termination. Generally only that part of the retirement benefit that

is payable in monthly installments (rather than, for example, lump

sum benefits payable to encourage early retirement) is guaranteed.

Retirement benefits that commence before the normal age of retirement are guaranteed, provided they meet the other conditions of

guarantee. Contingent benefits (for example, early retirement benefits provided only if a plant shuts down) are guaranteed only if the

triggering event occurs before plan termination.

There is a statutory ceiling on the amount of monthly benefits

payable to any individual that may be guaranteed. This ceiling,

which is indexed according to changes in the Social Security wage

base, is $3,221.59 for the year 2000 for a single life annuity payable at age 65. This limit is actuarially reduced for benefits payable

before age 65, or payable in a different form.

The reduction in the maximum guarantee for benefits paid before

age 65 is 7 percent for each of the first 5 years under age 65, 4

percent for each of the next 5 years, and 2 percent for each of the

next 10 years. The reduction in the maximum guarantee for benefits paid in a form other than a single life annuity depends on the

type of benefit, and if there is a survivor’s benefit, the percentage

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of the benefit continuing to the surviving spouse and the age difference between the participant and spouse.

For example, consider a retiree who, at plan termination in 2000,

is age 60 and whose spouse is 2 years younger. The participant is

receiving a joint and 50 percent survivor’s benefit (a benefit that

continues to a surviving spouse upon the death of the participant

at a reduced level of 50 percent). In this case, the maximum guarantee applicable to the participant is $1,846.94 per month

[$3,221.59 × 0.90 ( joint and survivor benefit) × 0.65 (participant

age) × 0.98 (spouse 2 years younger)].

The guarantee for any new benefit, including benefits under new

plans and benefits provided by amendment to already existing

plans, is phased in over 5 years following creation of the benefit.

Asset allocation.—Assets of a terminated plan are allocated to

pay benefits according to a priority schedule established by statute.

Under this schedule, some nonguaranteed benefits are payable

from plan assets before certain guaranteed benefits. For example,

certain benefits that have been in pay status for more than 3 years

have priority over guaranteed benefits not in pay status.

Section 4022(c) benefits.—The PBGC is also required to pay participants a portion of their unfunded, nonguaranteed benefits based

on a ratio of recovery on the employer liability claim to the amount

of that claim.

As a result of the asset allocation and section 4022(c) benefits,

reimbursement to the PBGC for its payment of guaranteed benefits

may be less than the total value of assets recovered from the terminated plan.

Multiemployer plans

In the case of multiemployer plans, the PBGC insures plan insolvency, rather than plan termination. Accordingly, a multiemployer

plan need not be terminated to qualify for PBGC financial assistance, but must be found to be insolvent. A plan is insolvent when

its available resources are not sufficient to pay the plan benefits for

the plan year in question, or when the sponsor of a plan in reorganization reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available

resources will not be sufficient to pay benefits that come due in the

next plan year.

If it appears that available resources will not support the payment of benefits at the guaranteed level, the PBGC will provide the

additional resources needed as a loan. The PBGC may provide

loans to the plan year after year. If the plan recovers from insolvency, it must begin repaying loans on reasonable terms in accordance with regulations.

The PBGC guarantees benefits under a multiemployer plan of

the same type as those guaranteed under a single-employer plan,

but a different guarantee ceiling applies. As a result of the Multiemployer Pension Plan Amendments Act of 1980 (Public Law 96–

364, referred to as MPPAA), the limit for multiemployer plans is

the sum of 100 percent of the first $5 of monthly benefits per year

of credited service, and 75 percent of the next $15 of monthly benefits. (The 75 percent is reduced to 65 percent for plans that do not

meet certain pre-ERISA minimum funding standards.)

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MPPAA requires that PBGC conduct a study every 5 years to determine whether changes are needed in the multiemployer premium rate or guarantee. PBGC completed the third such study in

1996, confirming the program’s financial solvency, but also finding

that inflation had devalued the existing guarantee limits. In 1999

the Clinton administration proposed to increase the guarantee limits for the multiemployer program to account for inflation since

1980. A similar proposal was made in previous years by the Clinton administration and in 1991 by the Bush administration.

FINANCIAL CONDITION OF THE PBGC

OVERVIEW

According to its most recent annual report, the PBGC’s multiemployer plan insurance program is in sound financial condition. Assets exceeded liabilities by $341 million at the end of fiscal year

1998.

By the end of fiscal year 1998, the larger single-employer program was showing an accumulated surplus of $5.0 billion. That is,

the assets in PBGC’s single-employer program were $5.0 billion

greater than the value of PBGC’s liability for future benefit payments. PBGC’s assets are comprised of premiums collected, assets

recovered from terminated plans and recoveries from employers,

and accumulated investment income. PBGC’s liability for future

benefit payments is the (discounted) present value of the stream of

future benefit payments PBGC is obligated to pay participants and

beneficiaries of terminated plans and plans booked as probable terminations. This is the third surplus in PBGC’s history and provides

a reserve against future claims.

CLAIMS FROM UNDERFUNDED PLANS

Through the end of fiscal year 1998, the PBGC’s single-employer

program had incurred net claims of $6.7 billion (see table 14–1).

PBGC’s net claims equal the portion of guaranteed benefit liabilities not covered by plan assets or recoverable employer liability.

These claims will eventually have to be covered through premiums,

earnings on PBGC assets, or other sources of revenues.

The claims against PBGC have increased considerably over its

history. Within that trend, there has been substantial annual variability due to the sporadic terminations of very large underfunded

plans.

Table 14–1 demonstrates the growth in net claims over the Corporation’s history. In the 8 years from 1991 to 1998, net claims, not

including probable terminations, exceeded those of the prior 8

years by 53 percent and were more than four times greater than

the net claims from the first 8 years of PBGC’s operation. PBGC

also faces probable net claims of $1.426 billion for 25 plans that are

expected to terminate after fiscal year 1998.

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TABLE 14–1.—CLAIM EXPERIENCE FROM SINGLE-EMPLOYER PLANS, 1975–98 AND

PROBABLE FUTURE TERMINATIONS 1

[Dollars in millions]

Year of termination Number of

plans

Benefit

liability

Trust plan

assets

Recoveries

from

employers

Net claims

Average

net claim

per

terminated

plan

1975–82 .............. 958 $1,194 $439 $175 $581 $0.6

1983–90 .............. 883 3,041 983 213 1,845 2.1

1991–98 .............. 814 6,357 3,143 389 2,825 4.1

Subtotal ...... 2,655 10,592 4,565 777 5,250 2.0

Probable future

terminations .... 25 3,309 1,715 168 1,426 ..............

Total ............ 2,680 13,901 6,280 945 6,676 ..............

1 Stated amounts are subject to change until PBGC finalizes values for liabilities, assets, and recoveries of terminated plans. Amounts in this table are valued as of the date of each plan’s termination and

differ from amounts reported in PBGC’s Financial Statements which are valued as of the end of the

stated fiscal year.

Note.—Numbers may not add up to totals due to rounding.

Source: Pension Benefit Guaranty Corporation.

As shown by table 14–2, the number of single-employer plan terminations that result in claims against the PBGC is a tiny fraction

of all plan terminations. Over the past two decades terminations of

underfunded plans made up less than 2 percent of all terminations.

PBGC’s surplus in the single-employer program at the end of fiscal

year 1998 was $5.0 billion, its third surplus ever.

FINANCING

The sources of financing for PBGC are per-participant premiums

collected from insured plans, assets in terminated underfunded

plans for which the PBGC has become trustee, investment earnings, and amounts owed to the PBGC by employers who have terminated underfunded plans. In addition, PBGC has the authority

to borrow up to $100 million from the Treasury.

Single-employer premiums

An employer that maintains a covered single-employer defined

benefit pension plan must pay an annual premium for each participant under the plan. Initially set at $1 per participant, the per-participant premium was raised to $2.60 beginning in 1979, and then

raised again by SEPPAA to $8.50 beginning in 1986. The PPA, contained in the Omnibus Budget Reconciliation Act of 1987, raised

the basic premium to $16, and imposed an additional variable rate,

or risk-related, premium on underfunded plans. The variable rate

premium was initially set at $6 per each $1,000 of the plan’s unfunded vested benefits, up to a maximum of $34 per participant.

Accordingly, the maximum premium was $50 per participant.

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The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) in- creased the basic premium to $19, and the variable rate premium

to $9 per each $1,000 of the plan’s unfunded vested benefits, up to

a maximum of $53 per participant. Thus, beginning in 1991, the

maximum premium was $72 per participant. OBRA 1990 did not

change the ratio of revenue raised by the basic and variable rate

portions of the premium.

TABLE 14–2.—TOTAL NUMBER OF TERMINATED SINGLE-EMPLOYER PLANS, NUMBER OF

PLANS WITH CLAIMS AGAINST PBGC, AND NET POSITION, 1975–98

Fiscal year

Number of

terminated

plans

Number of

claims

against PBGC

Net position

at end of

year (millions

of dollars)

1975 ................................................................. 2,570 100 ¥15.7

1976 ................................................................. 9,103 171 ¥41.0

1977 ................................................................. 7,332 130 ¥95.3

1978 ................................................................. 5,261 103 ¥137.8

1979 ................................................................. 4,892 82 ¥146.4

1980 ................................................................. 4,037 104 ¥94.6

1981 ................................................................. 5,086 137 ¥188.8

1982 ................................................................. 6,134 131 ¥332.8

1983 ................................................................. 6,879 149 ¥523.3

1984 ................................................................. 7,720 99 ¥462.0

1985 ................................................................. 8,750 115 ¥1,325.3

1986 ................................................................. 6,961 132 ¥3,826.4

1987 ................................................................. 10,970 105 ¥1,548.5

1988 ................................................................. 10,889 99 ¥1,543.3

1989 ................................................................. 11,484 84 ¥1,123.6

1990 ................................................................. 11,900 100 ¥1,912.8

1991 ................................................................. 8,768 168 ¥2,510.0

1992 ................................................................. 6,820 150 ¥2,737.1

1993 ................................................................. 5,437 117 ¥2,897.0

1994 ................................................................. 4,073 123 ¥1,240.0

1995 ................................................................. 3,977 107 ¥315.0

1996 ................................................................. 3,885 76 +869.0

1997 ................................................................. 3,547 50 +3,481

1998 ................................................................. 2,498 23 +5,012

Total ........................................................ 158,973 2,655 ..................

Source: Pension Benefit Guaranty Corporation.

The RPA did not change the $19 basic per participant premium.

However, the $53 per participant variable rate premium cap was

phased out over a 3-year period beginning in 1994. The variable

rate premium is now completely uncapped. RPA also changed the

way underfunding is calculated. Effective for 1995 plan years, liabilities have to be calculated using a standard mortality table. Effective for plan years beginning on or after July 1, 1997, liabilities

are calculated using an interest rate of 85 percent of the spot rate

for 30-year Treasury securities (an increase from the current 80

percent). In the future, plans will be required to use a new mortality table to be prescribed by the Secretary of Treasury for certain

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funding purposes. At that time the interest rate will rise to 100

percent of the Treasury spot rate and a requirement to use fair

market value of plan assets (rather than actuarial value) will become effective.

PBGC’s single-employer premium income equaled $966 million in

1998.

Multiemployer plan premiums

The premium for multiemployer plans was initially $0.50 per participant. The MPPAA raised the premium to $1.40 for years

after 1980. This premium was set to increase gradually to its current level, $2.60. PBGC’s multiemployer premium income equaled

$23 million in 1998.

Assets from terminated plans

When the PBGC becomes trustee of a terminated plan, it receives control of any assets in the plan. These assets are placed in

one of two trust funds (one for multiemployer plans, one for singleemployer plans).

Employer liability

An employer that terminates an underfunded defined benefit

plan is liable to the PBGC for certain amounts. Before the changes

made by SEPPAA, an employer’s liability was generally capped at

30 percent of the employer’s net worth. SEPPAA removed this

limit, leaving employers whose liability would have been capped

liable for an additional share of unfunded benefit commitments

above 30 percent of net worth. The PPA further increased employer

liability, leaving employers liable for all amounts up to 100 percent

of unfunded benefit liabilities.

Investment income

The PBGC maintains two separate financial programs, each consisting of a revolving fund and a trust fund, to sustain its singleemployer and multiemployer plan insurance programs. Its revolving funds consist of collected premiums and income resulting from

investment of the premiums. The revolving funds had a value of

$11.6 billion as of September 30, 1998.

The trust funds consist of assets received from all terminated

plans of which the PBGC is or will be a trustee, and employer liability payments. These assets are invested in a diversified portfolio of investments including equities, fixed income securities, and

real estate. The net market value of the trust funds was $6.5 billion as of September 30, 1998.

Chart 14–1 diagrams the relationship between the PBGC’s financing and its payment of guaranteed benefits to plan participants.

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CHART 14–1. FINANCIAL STRUCTURE OF THE PENSION BENEFIT GUARANTY

CORPORATION

Source: Congressional Budget Office.

BUDGETARY TREATMENT

Since 1981, administrative expenses of the PBGC and the benefit

payments to participants in plans under the PBGC’s trusteeship

have been counted as Federal outlays. Certain receipts of the agency—including premium payments, interest on balances in the revolving fund, and transfers to the revolving fund from the trust

fund—offset PBGC expenses in the Federal budget. Liabilities for

future benefit payments and other accruals are not taken into account. In each year since 1981 (when the program was first included in the Federal budget) the effect of the PBGC has been to

reduce overall Federal outlays (see table 14–3). During this period,

the PBGC reported receipts in excess of benefit payments and administrative costs by a cumulative total of about $8.4 billion. In

years before 1981, Federal accounts for the PBGC would also have

shown annual inflows exceeding expenses in each year of program

operation.

FUTURE FINANCIAL STATUS OF THE PBGC

PBGC reported $83 billion in pension underfunding in singleemployer plans as of January 1, 1996. Multiemployer plans represent $40.0 billion in underfunding as of January 1, 1996.

Not all pension underfunding represents likely claims upon

PBGC’s insurance. PBGC’s analyses disclose reasonably possible

losses of about $15 to $17 billion as of December 31, 1997, compared to the previous year’s projection of $21 billion.

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TABLE 14–3.—FEDERAL BUDGETARY TREATMENT OF THE PENSION BENEFIT GUARANTY

CORPORATION, 1975–98

[In millions of dollars]

Fiscal year Expenses 1

Offsetting

collections 2

Outlays

appearing in

the Federal

budget 3

Not included in the Federal budget 4

1975 ....................................................................... $3.2 $35.5 NA

1976 ....................................................................... 12.8 28.5 NA

1977 ....................................................................... 21.0 41.0 NA

1978 ....................................................................... 47.6 61.9 NA

1979 ....................................................................... 52.3 91.5 NA

1980 ....................................................................... 59.1 90.1 NA

Total .............................................................. 196.0 348.5 NA

Included in the Federal budget 4

1981 ....................................................................... 79 123 ¥$29

1982 ....................................................................... 104 157 ¥67

1983 ....................................................................... 161 182 ¥10

1984 ....................................................................... 180 190 ¥10

1985 ....................................................................... 195 210 ¥19

1986 ....................................................................... 272 344 ¥106

1987 ....................................................................... 509 637 ¥72

1988 ....................................................................... 489 560 ¥278

1989 ....................................................................... 780 1,190 ¥149

1990 ....................................................................... 745 1,175 ¥680

1991 ....................................................................... 599 1,339 ¥787

1992 ....................................................................... 766 1,491 ¥655

1993 ....................................................................... 833 2,323 ¥1,508

1994 ....................................................................... 1,017 1,446 ¥385

1995 ....................................................................... 872 1,716 ¥430

1996 ....................................................................... 1,011 1,812 ¥851

1997 ....................................................................... 930 2,147 ¥1,197

1998 ....................................................................... 1,001 2,252 ¥1,218

Total .............................................................. 10,544 19,287 ¥8,450

1 Includes primarily administrative costs and benefit payments.

2 Includes primarily premium income, interest income, and transfers from the pension insurance trust

fund to the revolving fund. 3 Outlays do not equal the difference between expenses and offsetting collections because of changes

in obligated program balances between the beginning and the end of the fiscal year. 4 The Pension Benefit Guaranty Corporation was first included in the Federal budget in 1981, in accordance with Public Law 96–364.

NA—Not applicable.

Note.—This table includes both the single-employer and multiemployer pension insurance programs.

Source: Congressional Budget Office using data from the appendix to the Federal budget, various

years.

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The future financial condition of the pension insurance program

is highly uncertain because it depends largely on how many private

pension plans terminate and on the amount of underfunding in

those plans. Both factors are hard to forecast accurately. Moreover,

as was discussed above, a few pension plans with extremely large

unfunded liabilities have dominated the Pension Benefit Guaranty

Corporation’s (PBGC) past claims, and its future may likewise depend significantly on the fate of a few large plans, making liabilities even more difficult to predict. Future terminations will probably be influenced by overall economic conditions, by the prosperity

of particular industries, by competition from abroad, and by a variety of factors that are specific to particular firms—such as their

competitive position in the industry, their agreements with labor

groups, and the assessments of their financial prospects that are

necessary to obtain credit. In addition, PBGC’s losses with respect

to future terminations will depend on how well companies fund

their plans, and on the PBGC’s position in bankruptcy proceedings.

In its fiscal year 1998 annual report, PBGC presented a new

methodology for analyzing long-term claims exposure. The PBGC’s

new methodology uses a stochastic model called the Pension Insurance Modeling System (PIMS). PIMS evaluates PBGC’s exposure

under current pension funding rules as a function of a variety of

economic parameters. The model recognizes the uncertainty in companies’ chances of future bankruptcy and the uncertainty in key

economic parameters (particularly interest rates and stock returns). It simulates the claims that could develop under thousands

of combinations of economic parameters and bankruptcy rates.

Using the model, PBGC estimates median claims over the next 10 years will be about $600 million per year (in present value

terms); that is, half of the scenarios show claims above $600 million per year and half below. The mean (average) level of claims

is much higher, more than $900 million per year, because there is

a chance under some scenarios that claims could reach very high

levels. For example, PIMS estimates a 10 percent chance that

claims could exceed $2.1 billion per year.

PIMS projects PBGC’s potential future financial position by combining simulated claims with simulated premiums, expenses, and

investment returns. The median outcome is an $11.1 billion surplus in 2008 (in present value terms), while the mean outcome is

an $8.8 billion surplus. However, the model also shows the potential for significant downside outcomes. In particular, it estimates

nearly a 20 percent chance that the agency could return to a deficit

in the next 10 years, and a 10 percent chance that the deficit could

exceed $6.3 billion in 2008 (in present value terms). These adverse

outcomes are most likely if the economy performs poorly, in which

case PBGC may experience both large claims and investment

losses.

PBGC’s fiscal year 1998 report also presented three forecasts

under its former methodology, which relied on an extrapolation of

the agency’s claims experience and the economic conditions of the

past two decades. The report presented three different forecasts of

future claims and resulting deficits and surpluses to indicate the

potential variability of its financial condition. Forecast A is based

on the average annual net claim over the entire PBGC history

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($527 million per year) and projects a surplus of $11.5 billion by

the end of fiscal year 2008 ($6.6 billion in present value terms for

comparison to PIMS). Forecast B is based on the average annual

net claim for the most recent 11 fiscal years ($611 million per

year). Under forecast B, PBGC projects a surplus of $10.5 billion

by the end of fiscal year 2008 ($6.0 billion in present value terms).

Forecast C assumes $1.5 billion of net claims each year and assumes the termination of all plans that represent reasonably possible losses over the next 10 years. Under forecast C, PBGC

projects a deficit of $2.5 billion by the end of fiscal year 2008 ($1.4

billion in present value terms).

LEGISLATIVE HISTORY

SINGLE-EMPLOYER PLANS

The PBGC was established under the Employee Retirement Income Security Act of 1974 (ERISA) for the purpose of insuring benefits under defined benefit pension plans. As originally structured,

in the case of a single-employer plan, termination of a plan triggered the PBGC insurance mechanism. The contributing employer

was liable to the PBGC for unfunded insured benefits up to 30 percent of the net worth of the employer. If unfunded insured liability

exceeded this amount, the PBGC had to absorb the excess and

spread the loss over insured plans. Employers generally faced no

restrictions on their ability to terminate an underfunded plan.

The Single Employer Pension Plan Amendments Act of 1986

(SEPPAA)

Congress passed SEPPAA (enacted as title XI of the Consolidated

Omnibus Budget Reconciliation Act of 1985 (Public Law 99–272))

in response to rapidly growing PBGC deficits. SEPPAA raised the

per-participant premium from $2.60 to $8.50, established certain financial distress criteria that a sponsoring employer and every

member of the employer’s controlled group must meet in order to

terminate an underfunded plan, expanded PBGC’s employer liability claim, and created a new liability to plan participants for certain nonguaranteed benefits.

Pension Protection Act of 1987

In 1987 Congress passed the Pension Protection Act of 1987

(PPA; as part of Public Law 100–203) which contained additional

measures to strengthen PBGC’s long-term solvency. The act increased PBGC’s basic per participant premium for single-employer

plans to $16 and added a variable rate premium for these plans

tied to the degree of plan underfunding (capped at $53 per participant). The act also expanded PBGC’s employer liability claim to include all plan benefit liabilities, provided that PBGC share a portion of its recoveries from employers with plan participants, and required faster funding of plan benefits to reduce PBGC’s exposure

in the event of plan termination. The act also contained other provisions relating to the plan termination distress criteria, the bankruptcy treatment of unpaid employer contributions, PBGC’s lien

authority, and various pension funding requirements.

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Retirement Protection Act of 1994 (RPA)

In response to the persistent growth in pension underfunding,

Congress passed significant reforms in RPA (enacted December 8,

1994) as part of the GATT legislation (the Uruguay round Agreements (Public Law 103–465)). RPA provisions include:

1. Minimum funding standards.—RPA strengthened the pension

funding rules for underfunded plans by accelerating funding,

eliminating double counting of certain funding credits, and constraining the assumptions that may be used to calculate pension contributions. RPA also required severely underfunded

plans to maintain minimum levels of liquid assets. RPA contained certain transition rules limiting annual increases in

pension contributions. In addition, RPA repealed the quarterly

funding requirement for fully funded plans and granted excise

tax relief for employers with both defined benefit and defined

contribution plans.

2. Variable rate premium.—RPA phased out the $53 per participant cap on the variable rate premium over a 3-year period as

an incentive to improve funding in underfunded plans and

made certain changes to the interest rate and mortality assumptions used to calculate plan underfunding.

3. Reporting to PBGC.—RPA requires sponsors with over $50 million in underfunding to provide PBGC detailed actuarial information on underfunded plans and detailed company financial

information. It also requires privately-held companies with

over $50 million in underfunding and an aggregate funding

ratio of less than 90 percent to provide advance notice to PBGC

of certain corporate transactions.

4. Disclosure to participants in underfunded plans.—RPA requires most employers whose plans are less than 90 percent

funded to provide a notice to participants regarding the funding status of the plan and the limitations of PBGC’s guarantee

of participants’ benefit.

5. Missing participants program.—RPA established a program

under which PBGC serves as a clearinghouse for benefits of

missing participants in plans terminating in a standard (fully

funded) termination.

RPA contained other provisions relating to enforcement of minimum funding requirements, PBGC liens for missed pension contributions, and limitation of benefit increases while a company is

in bankruptcy.

MULTIEMPLOYER PLAN INSURANCE PROGRAM

Coverage for multiemployer plans under ERISA was structured

similarly to that of single-employer plans. However, the PBGC was

not required to insure benefits of multiemployer plans that terminated before July 1, 1978. Congress extended the deadline for mandatory pension coverage several times, until enactment of the

MPPAA (Public Law 96–364). MPPAA required more complete

funding for multiemployer plans, especially those in financial distress. It also improved the ability of plans to collect contributions

from employers. MPPAA changed the insurable event that triggers

PBGC protection to plan insolvency, rather than plan termination.

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Thus, if a multiemployer plan becomes financially unable to pay

benefits at the guaranteed level when due, the PBGC will provide

financial assistance to the plan, in the form of a loan. Finally,

MPPAA imposed withdrawal liability on employers who ceased to

contribute to a multiemployer plan.