There’s a sense of foreboding building at the Pension Benefit Guarantee Corp. nowadays.
Late last month, the insurer of the country’s private defined benefit plans announced that the condition of single employer-provided pensions has greatly improved, and that projected deficits are expected to narrow dramatically in the next few years, thanks in large part to controversial premium increases shouldered by plan sponsors.
The prognosis was not nearly as positive for many of the nation’s 1,400 multiemployer plans, in which multiple employers in the same industry typically contribute to a single pension fund and where the premiums are much smaller. In fact, it’s rather bleak for about 10 percent of participants in these pooled plans; the PBGC is projecting insolvencies affecting 1.5 million multiemployer beneficiaries are “more likely and more imminent.”
The potential loss of billions of dollars in participant benefits isn’t the only issue casting a cloud over the PBGC.
Key provisions of the 2006 Pension Protection Act are set to expire at the end of December.
The PPA offered relief to the most distressed plans by allowing sponsors to reduce benefits, a tactic that had previously been forbidden under ERISA.
The law also restricted distressed plans from increasing benefits, or issuing lump-sum payments to participants upon retirement.
Another important PPA provision eliminated an excise tax, levied by the IRS, on sponsors whose plans are underfunded. The intention of the tax was to encourage sponsors to make annual minimum contributions to their plans all along. Congress eliminated it to relieve pressure on strained plans in the hopes that sponsors would not terminate their defined benefits.
Plan sponsors, particularly those in underfunded multiemployer plans, took advantage of the PPA in a big way. In 2010, $2 billion in excise taxes were avoided. Another $2 billion in liabilities were reduced thanks to adjustments allowed under the law.
Absent an act of Congress, these relief measures won’t be available going forward.
So, again, it’s no wonder the PBGC is on edge.
Enter the advocate
Later this year, Constance Donovan plans to go before the relevant subcommittees in both chambers of Congress and report her findings on the state of affairs at the PBGC.
As the Participant and Plan Sponsor Advocate at the PBGC, Donovan’s job is to represent the interests of plan sponsors before Congress.
Donovan’s position was created with the enactment of the Moving Ahead for Progress in the 21st Century Act, which was signed into law in July of 2012. She is the first person to hold the title at the PBGC.
She answers to PBGC Director Josh Gotbaum but is supposed to offer an independent voice. “We have many things we agree upon,” says Donovan, “and a few where we don’t. There is a mutual respect. He’s very committed to his responsibilities in managing the PBGC.”
But can an internal liaison between plan sponsors at the PBGC – one whose boss is calling for greater latitude in assessing premiums and regulations over plan sponsors – really be free to fully advocate on behalf of sponsors’ interests, which are often in opposition to the PBGC’s agenda?
Sponsors wondering about that question may be relieved to hear just how seriously Donovan is taking up their cause.
“We absolutely have to be able to better explain ourselves,” says Donovan. “And we have to do a better job of understanding who the customer is — the plan participants, the plan sponsors, the trade and advocacy groups. We are a government agency here to help business. We have to have a better business sense.”
The possibility of premium increases has many sponsors up in arms, but to Donovan, it’s the enforcement of the 4062(e) regulation that highlights where the PBGC could better deploy some of the common sense she suggests is sometimes missing.
The ERISA provision allows the PBGC to assess liability costs to a sponsor when an employer ceases “operations at a facility in any location.”
The problem, as Donovan sees it, is that the “PBGC has too broad of an interpretation of what constitutes a cessation of operations.”
“A transaction may pose no threat whatsoever to a sponsor’s pension plan, but it’s perceived that way by the PBGC,” explains Donovan.
Since 2007, 130 4062(e) assessments have been levied, according to Donovan. In no cases have those plans been terminated.
In Donovan’s tenure as advocate, all of the 4062(e) claims she’s dealt with involved frozen plans, meaning they were not accruing liabilities going forward. What’s more, they all had been making faithful annual contributions to their plans, and were generally funded at a 92- to 97-percent level.
Her point: these were not distressed plans. In fact, their sponsors were often models of pension funding efficiency. So why, she wonders, is the PBGC assessing liabilities for routine sales of assets?
Worse yet, the assessments, says Donovan, are almost always are far greater than the value of the asset sale. “A company can make an asset sale of $60 million and be assessed a 4062(e) liability that far exceeds the value of the asset sale by the millions. These are major liabilities we are talking about.”
“Even if a company is struggling,” Donovan says, “it doesn’t help anyone to kick them when they’re down.”
Gotbaum said the PBGC has, in fact, already made changes to the way the rule is enforced and that, today, 90 percent of plan sponsors are effectively exempted from 4062(e) enforcement.
In all of 2013, 63 plan sponsors made asset sales that triggered a 4062(e) response. The PGGC enforced action in only 20 percent of those cases, he said.
“You would be hard-pressed to find a government agency as willing to listen to industry as we are,” insists Gotbaum.
The liabilities that are covered by sponsor premiums may be a different matter.
For fiscal 2013, single-employer and multiemployer plans paid over $3 billion in premiums to the PBGC.
Single-employer plans accounted for more than $2.9 billion of that, while multiemployer plans paid $110 million, according to the PBGC’s annual report.
Congress this year raised the flat-rate PBGC premium from $42 to $49 a year per plan participant. In 2015, the rate goes to $57 and will climb to $67 in 2016. Multiemployer premiums, however, remain much lower, just $12 annually per plan participant.
To Gotbaum, there’s more at stake than the PBGC’s finances.
“My primary concern is not so much the PBGC’s deficit as it is whether or not Americans will have pensions to retire on,” says Gotbaum.
Gotbaum notes that while costs vary from employer to employer, on average, premiums paid to the PBGC account for less than one-half of 1 percent of the total labor costs of insured sponsors.
To Gotbaum, what needs to happen next is clear. “If we are to do our job, if we are expected to continue to preserve the pensions of Americans when plans fail, then the PBGC needs sufficient funding, which we currently don’t have.”
“There has to be premium increases for multiemployer plans,” he says. “That’s just the reality we’re all facing together.”
And without one? The multiemployer pension plan insurance program's deficit will widen to $49.6 billion by 2023, up from $8.3 billion last year, the PBGC says.
Congress, of course, would have to approve such an increase. Whether it will is the question causing so many sleepless nights for the PBGC, not to mention the many retired beneficiaries who would likely see cuts in benefits.