The Plight of the Pension Benefit Guaranty Corporation

Abstract

The Pension Benefit Guaranty Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 to insure the vested benefits of defined benefit pension plans. Over the past 40 years its funding requirements and insurance premiums have been strengthened and increased many times, most recently by the Multiemployer Pension Reform Act of (December) 2014. Yet the PBGC remains in difficult straights. The plight of the PBGC is that, whatever it does to improve its short-run prospects will result in more plan failures and terminations in the long run.

Keywords

ERISA PBGC MPRA pension retirement income funding

The Employee Retirement Income Security Act (ERISA) was passed in 1974 and was in full effect by 1980. It established minimum standards for participation, vesting, funding, accrual, fiduciary responsibility and reporting and disclosure. ERISA covers private-sector pension and welfare (health) benefit plans. Its primary focus, however, was the defined-benefit (DB) pension plan. ERISA does not cover church or public sector (governmental) employers.

ERISA also created the Pension Benefit Guaranty Corporation (PBGC) to insure the vested pension benefits of participants in DB pension plans. Defined-contribution (DC) plans are, by definition, always fully funded. Their participants do not need benefit insurance.

The PBGC operates two benefit insurance programs that are quite different from each other. One is the Single-Employer Program. As its name implies, this program covers DB pension plans sponsored by individual employers. The other is the Multiemployer Program. Multiemployer plans are collectively bargained between a labor organization and two or more (usually many) employers in an industry, group of related industries or a region.

The PBGC is in trouble. While the numerous PBGC insurance premium increases will allow some short-term respite, the long-run prospects of the PBGC are bleak. The more premiums are increased (and now indexed) and the more Congress adopts other measures to shore-up pension funding, the more costly and risky it is to sponsor DB plans and the more motivated employers are to shift to less costly and less risky DC plans.

The question as to whether the Congress will come to the aid of an insolvent PBGC with general fund dollars has just been answered. The Multiemployer Pension Reform Act of (December) 2014 (MPRA) demonstrated that it will not. The MPRA allows trustees of troubled multiemployer pension plans to cut vested benefits of participants and beneficiaries, including those already retired and in pay status. That is troubling for the participants and beneficiaries of such plans and for the United States. It portends a sizable increase in future elder poverty.

This article examines the PGBC in terms of its funding, benefits, financial status, problems and the causes of those problems and possible solutions through the enactment of the MPRA.

Funding

Single-Employer Program

The PBGC is funded by a premiums paid by employers that sponsor private-sector DB pension plans. Originally, the premium was $1 per participant. That soon proved inadequate, and as indicated in Table 1, the rate was increased a number of times until the flat-rate (per-participant) premium reached $16 in 1988. In that year, a variable-rate premium (VRP) of $6 per $1,000 of unfunded vested benefit liability was added. In 1991, the flat rate was increased to $19 and the VRP to $9 per $1,000 of unfunded vested benefits. The VRP remained at that level through 2013.

Table 1.

PBGC Premium Rates.

Single-employer program				Multiemployer program
Year	Flat rate premium ($)	Variable rate premium ($)	VRP cap per participant ($)	Year	Flat rate premium ($)
1974-1977	1.00			1974-1979	0.50
1978-1985	2.60			1980-1984	1.40
1986-1987	8.50			1984-1986	1.80
1988-1990	16.00	6.00		1986-1988	2.20
1991-2005	19.00	9.00		1988-2005	2.60
2006	30.00	9.00		2006-2007	8.00
2007	31.00	9.00		2008-2012	9.00
2008	33.00	9.00		2013-2014	12.00
2009	34.00	9.00		2015^a	26.00
2010-2012	35.00	9.00		2016^a	26.00
2013	42.00	9.00	400
2014	49.00	14.00	412
2015	57.00	24.00	418
2016	64.00	29.00	500

Notes. ^aRate doubled by Multiemployer Pension Reform Act of (December) 2014. All rates indexed effective 2016.

Source. Pension Benefit Guaranty Corporation. For 1974 to 2013: Pension Insurance Data Tables S-39 and M-17. For 2014 to 2016: PBGC website. Retrieved from http://www.pbgc.gov/prac/prem/premium-rates.html.

In 2012, Congress enacted the Moving Ahead for Progress in the 21st Century Act (MAP-21). It contained language that further increased PBGC premiums. The flat rate went from $35 in 2012 to $42 in 2013 to $49 in 2014. In 2015, the flat rate premium is $57 and the VRP to $24 with a cap of $418. The Bipartisan Budget Act of 2013 increased the 2016 flat rate premium to $64 and VRP to $29. However, that may change due to indexing. The cap will be $500 in 2016. Premium rates will be indexed to the National Average Wage Index (NAWI) beginning 2016.

Commencing in 2006, a special premium on certain terminated pension plans went into effect. It is $1,250 per participant for each of the 3 years following a plan’s termination. There are various exemptions to this payment including the airline industry, employers in bankruptcy and any plan terminated before 2006.

Multiemployer Program

ERISA paid relatively little attention to the funding of multiemployer pension plans. As of 1974, none had terminated. The PBGC was given discretion over whether or not to insure such plans. Three multiemployer plans sought PBGC protection during the period when insurance was discretionary, thus demonstrating that such plans could fail. It also revealed that when employers withdrew from a multiemployer plan, they had no ongoing financial obligations to the plan.¹ That changed with the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).

The MPPAA mandated that when an employer withdrew from a multiemployer pension plan, it must continue to fund its share of the plan’s unfunded liabilities. They could no longer walk away and leave the remaining sponsors with the bill. This often made withdrawal from a multiemployer plan impractical, especially after 2000 when unfunded liabilities soared.

Table 1 also reports the history of PBGC multiemployer premium rates. Until 2006, they were quite low. This reflects the much lower benefit guarantees and different PBGC intervention procedures. From 2007 through 2012, the premium rates were indexed to the NAWI. Indexing will resume beginning 2016. The multiemployer premium rate for 2015 and 2016 was doubled from $13 to $26 per participant by the MPRA of 2014.

PBGC Intervention

Single-Employer Program

There are three types of plan terminations. A “standard termination” under which the sponsor voluntarily discontinues the plan after discharging its benefit obligations through contributions, lump sum distributions and/or a group annuity contract with an insurance company. A “forced termination” is one initiated by the PBGC to prevent a troubled plan from incurring additional unfunded liabilities that will eventually be acquired by the PBGC. And a “stress termination” occurs when the plan is insolvent and the PBGC acquires the assets and benefit obligations of the plan. The PBGC may also acquire up to 30% of the sponsor’s assets in a bankruptcy proceeding.

In the Single-Employer Program, a failed pension plan is “trusteed” (taken over) by the PBGC. The plan is terminated and the PBGC pays its benefits. As of 2014, a cumulative total of 4,650 single-employer plans have been trusteed, including 86 in that year.²

Multiemployer Program

When a multiemployer pension plan is unable to pay its scheduled benefits because its funds are depleted and its employer members have withdrawn and no longer contribute, the plan continues in existence. The PBGC “lends” the plan the money to continue to pay its expenses and benefits (reduced to the PBGC guarantee level). The word “lends” is a bit of a misnomer. There has been only one case in which a plan has repaid its loan from the PBGC. It is unlikely that that will ever happen again.

Benefit Guarantees and Amounts

Single-Employer Program

As indicated in Table 2, the maximum PBGC benefit guarantees under the Single-Employer Program appears to be rather generous. In 2015, the maximum unadjusted benefit for a participant age 65 is $5,011 per month or $60,136 per year.³ If he or she is younger and/or has elected a survivor benefit option, it would be less. Few participants in trusteed plans are entitled to anything near the maximum benefit. Table 2 also reports the average and the median monthly benefit actually paid. For 2012, when the maximum monthly guarantee was $4,653, the average benefit paid was $559 and the median $284. That amounts to $6,708 and $3,408 per year, respectively.

Table 2.

Maximum Guaranteed Benefits and Average and Median Benefit Amounts Paid Under the Single-Employer Program, Selected Years, 1990 to 2015 (Rounded).

Year	Maximum monthly guarantee ($)	Maximum annual guarantee ($)	Average monthly benefit ($)	Median monthly benefit ($)
1990	2,165	25,977	262	184
1995	2,573	30,886	344	232
2000	3,222	38,659	309	206
2005	3,801	45,614	487	286
2010	4,500	54,000	594	316
2011	4,500	54,000	579	287
2012	4,653	55,841	559	284
2013	4,790	57,477	NA	NA
2014	4,943	59,318	NA	NA
2015	5,011	60,136	NA	NA

Source. For 1990 to 2014: Pension Benefit Guaranty Corporation. Pension Insurance Data Tables S-20 and S-53. Retrieved from www.pbgc.gov. For 2015: PBGC News Release dated October 27, 2014.

While the maximum benefit amounts are indexed and increased each year, the benefit amount once determined is fixed. It is not adjusted for inflation and therefore deteriorates in real (purchasing power) terms over time. In addition, deferred benefits for those too young to retire are fixed as of the date the plan is trusteed or the date the sponsor enters bankruptcy.

While the PBGC reports that, as of 2006, almost 85% of insured participants in trusteed plans were receiving the full amount of the earned benefit, those benefit amounts are often pretty small. Of course, to those recipients who would otherwise be totally reliant on Social Security benefits, the PBGC payments are welcomed additional income.

Multiemployer Program

Figure 1 presents the formula and the maximum monthly and annual benefit guarantees under the Multiemployer Program. The formula was made more generous (or less parsimonious) by the Consolidated Appropriations Act of 2001 for plans that became insolvent after 2000. Since 2001, the maximum guarantee for a participant with 30 years of credited service is $1,072 per month or $12,870 per year. Relatively few participants are entitled to the maximum benefit because they have less than 30 years of service and for the other reasons mentioned above.

Figure 1.

Maximum Guaranteed Benefits Under the Multiemployer Program (with 30 years of service).

The PBGC publishes data on average and medium monthly payments for the Multiemployer Program for the dwindling number of surviving payees of the 10 plans trusteed prior to the passage of the MPPAA in 1980. In 2012, there were 74 of them. The real significance of the multiemployer guarantees is that, when an insolvent plan receives financial assistance (loans) from the PBGC, it must reduce its benefits to the PBGC guarantee level.

Financial Status of the PBGC

Single-Employer Program

The PBGC was designed to be self-supporting. It gets its revenue from employer-paid premiums, assets acquired from trusteed pension plans from employers in bankruptcy and from earnings on invested assets. The PBGC receives no money from the general fund and there is no provision for the U.S. government to come to its aid should it become insolvent.

Table 3 captures the financial position of the PBGC from 1980 to 2014. For the Single-Employer Program, assets, liabilities and net-position data are from the PBGC. I calculated the “funded ratios” (assets ÷ liabilities), a measure of “percent funded.” Liabilities are the present value of projected benefit obligations. Funded ratios are widely used (including by the PBGC) to gauge the financial health of defined-benefit pension plans. They allow longitudinal and cross-sectional comparisons among such plans. While unconventional, funded ratios also capture the funded status of the PBGC single-employer and multiemployer programs.

Table 3.

Net Financial Position of PBGC-Insured Single-Employer and Multiemployer Programs ($ in Millions).

	Single-employer program				Multiemployer program
Year	Assets ($)	Liabilities ($)	Net position ($)	Funded ratio^a	Assets ($)	Liabilities ($)	Net position ($)	Funded ratio^a
1980	430	524	−95	82.1	21	30	−9	70.0
1985	1,155	2,480	−1,325	46.6	78	52	27	150
1990	2,797	4,710	−1,913	59.4	190	56	132	339.3
1995	10,371	10,686	−315	97.1	447	285	192	156.8
2000	20,830	11,126	9,704	187.2	694	427	267	162.5
2005	56,470	79,246	−22,776	71.3	1,160	1,495	−335	77.6
2010	77,463	99,057	−21,594	78.2	1,628	3,064	−1,436	53.1
2011	78,960	102,226	−23,266	77.2	1,739	4,509	−2770	38.6
2012	82,973	112,115	−29,142	74.0	1,807	7,044	−5,237	25.7
2013	83,227	110,608	−27,381	75.2	1,719	9,977	−8,258	17.2
2014	88,013	107,351	−19,338	82.1	1,769	44,203	−42,434	4.0

Notes. ^aCalculated by author.

Source. Pension Benefit Guaranty Corporation. For 1980 to 2012: Pension Insurance Data Tables S-1 and M-1. Retrieved from www.pbgc.gov. For 2013 and 2014: PBGC FY 2014 Annual Report. Unnumbered table titled “Key Single-Employer and Multiemployer Results,” p. 22.

After running a deficit from its inception, the Single-Employer Program did well during the 1990s. By 2000, its assets were $20.8 billion and its liabilities $11.1 billion. That gave it a net position (surplus) of $9.7 billion and a funded ratio of 187.2. After 2000, assets continued to grow, but liabilities grew more. Beginning in 2002 (not shown), the Single-Employer Program ran a deficit. By 2012, it had a deficit of $29.1 billion and its funded ratio was 74.0. In 2013 and 2014, assets increased, liabilities and the net position declined and the funded ratio increased to 82.1 in 2014. The improvement was due to the substantial gains in the equity market and to the recent increases in PBGC premium rates. There was also a complex array of interest rate and actuarial adjustments made in 2013.⁴ It will be interesting to see if the improvement in the Single-Employer Program continues.

Multiemployer Program

The Multiemployer Program is in much worse shape. It too was well funded through 2000. In that year, it had $694 million in assets and $427 million in liabilities. Its net position was $267 million and its funded ratio was 162.5 (down from 339.3 in 1990). Optimistically assuming that the halcyon days would continue, many multiemployer plans enhanced their benefits in the late 1990s and early 2000s.

Beginning 2003, the Multiemployer Program began to run a deficit. By 2013 its net position was −$8.3 billion and the funded ratio an alarming 17.2. Then, in 2014, its net position plummeted to −$42.4 billion and its funded ratio to 4.0 (Table 3).

What Happened?

PBGC accounting is complicated. It counts as liabilities not only those plans that are currently receiving financial assistance but also those plans that have terminated but are not yet receiving assistance and those that the PBGC expects will deplete their assets and will need financial assistance within 10 years. As of the end of FY 2014 (September 30), 53 plans were receiving financial assistance, the present value of which was $1.5 billion. Another 61 plans were terminated but not yet receiving money from the PBGC. Though they were not receiving regular contributions from employers, some of them were receiving MPPAA withdrawal liability payments. The present value of the future financial assistance for these plans was $1.8 billion. There were another 30 plans that had not yet terminated that the PBGC expects to terminate and need financial assistance in the future. Such plans are classified as “probable.” The present value of these probable payments in 2014 was set at $40.9 billion, up from $6.7 billion in 2013.⁵

Between 2013 and 2014, two large plans were added to the list of “probable.” One was the Teamsters Central States Pension Plan, which is classified as critical. It has 400,000 participants and has a current funded ratio 17%. The other, the United Mine Workers pension plan, is classified as endangered. It has 115,000 participants and a current funded ratio of 35%.⁶

In 2014, the combined Single-Employer Program and Multiemployer Program deficit (negative net position) was $61.8 billion, up from $35.6 billion in 2013 and compared to a surplus of almost $10 billion in 2000 (Table 3).

There are numerous factors underlying the long-run deterioration of the net position of the PBGC. They include the decline in the number of insured plans, the decline in the number and percentage of active participants relative to retired and vested separated participants, increased life expectancy of current and future retirees of trusteed plans, the increasing cost of PBGC insurance premiums and possibly problems with the rate of return on invested assets.

Number of Plans

As reported in Table 4, the number of PBGC insured plans in the Single-Employer Program has plummeted from 112,000 in 1985 to just 23,000 in 2013. During the same period, multiemployer plans declined from 2,188 to 1,435. However, even this overstates the true magnitude of the decline.

Table 4.

PBGC-Insured Plans, Participants and Participant Status, Selected Years, 1980 to 2013.

	Single-employer program					Multiemployer program
Year	Total insured plans	Total insured participants	Percent active	Percent retired	Percent separated vested	Total insured plans	Total insured participants	Percent active	Percent retired	Percent separated vested
1980	95,439	27.5	77.6	16.0	6.4	2,244	8.0	75.9	17.7	6.5
1985	112,208	29.8	72.2	18.7	9.1	2,188	8.2	66.1	22.6	11.4
1990	91,899	31.6	68.1	19.4	12.6	1,983	8.5	58.6	25.2	16.2
1995	53,589	32.6	57.8	22.9	19.3	1,879	8.6	52.4	28.9	18.7
2000	35,373	34.1	51.9	24.4	23.7	1,744	9.1	51.1	30.1	18.7
2005	29,605	34.2	45.7	26.6	27.6	1,571	9.9	45.7	30.8	23.5
2010	26,377	33.4	38.5	30.9	30.6	1,475	10.4	39.1	33.1	27.7
2011	25,607	33.4	37.8	31.7	30.5	1,461	10.3	38.3	33.7	27.9
2012	24,215	32.5				1,448	10.4
2013	23,399	31.9				1,435	10.4

Source. Pension Benefit Guaranty Corporation. Pension Insurance Data Tables S-30, S-32, S-33, M-5, M-6 and M-7. Retrieved from www.pbgc.gov.

Many of the nominal DB plans are frozen (closed to new members and/or benefit accrual ceased). Many others are hybrid cash balance (CB) or pension equity plans (PEP) that, though classified as DB plans, function more like a defined contribution plans. Frozen and hybrid plans must continue to be funded and sponsors must continue to pay PBGC insurance premiums.

New traditional DB plans are not being established. What is being created are hybrid cash balance and, to a lesser extent, pension equity plans. In recent years, the vast majority of such plans have been adopted by relatively small medical, legal and other professional corporations.⁷ The fact that the total number of DB plans continues to decline in spite of this growth in hybrid plans masks the true decline in traditional DB pension plans.

Why would anyone establish a traditional DB plan that would have to comply with the current ERISA funding requirements (including 7-year amortization of unfunded liabilities) and the ever-increasing PBGC premiums (which will go to existing underfunded or failed plans of other employers) when there are better DC arrangements available, such as Section 401(k) plans?

Participants

Single-Employer Program

In both programs the total number of insured participants has generally increased over the years. As shown in Table 4, the numbers of total participants in single-employer plans have grown from 27.5 million in 1980 to 31.9 million in 2013. However, the distribution of those participants among the “active,” “retired” and “separated vested” categories has changed drastically. Active participants in the Single-Employer Program have declined from 77.6% (23.1 million) of the total in 1980 to 37.8% (12.6 million) in 2011, the most recent year for which data are available. Meanwhile, the percentage of retirees and separated vested former employees had increased proportionately to 31.7% and 30.5%, respectively.

Multiemployer Program

The multiemployer plans have experienced a similar shifts. While total insured participants increased from 8 million in 1980 to over 10 million in 2011, their distribution changed. In 1980, 75.9% (6.1 million) of its insured participants were active. By 2011, 38.3% (3.9 million) were active. Again, the retired and separated vested populations grew proportionately to 33.7% and 27.9%, respectively.

As the number and percentage of active participants continue to decline, it will become more difficult to further increase the PBGC premiums of the employers of those participants while their competitors (here and abroad) enjoy lower pension expenses.

From another perspective, private sector single-employer and multiemployer DB pension plans have become much less important in the American economy than they once were, as indicated in Table 5. In 1980, the total single-employer and multiemployer DB plans combined covered 49.4% of private sector wage and salary workers. By 2011, it was 13.3%. No doubt, the decline has continued since 2011.

Table 5.

PBGC-Insured Active Participants as a Percentage of Private Sector Wage and Salary Workers, Selected Years, 1980 to 2011 (Participants in Millions).

	Private sector wage and salary workers	Single-employer active participants		Multiemployer active participants		Total active participants
Year	Number	Number	Percentage^a	Number	Percentage^a	Number	Percentage^a
1980	74.9	28.8	38.3	8.2	10.9	37.0	49.4
1985	82.2	26.2	31.9	6.6	8.0	32.8	39.9
1990	89.6	20.0	26.8	5.5	6.1	29.6	33.0
1995	96.4	19.6	20.3	4.7	4.9	24.2	25.1
2000	108.1	16.4	15.2	4.3	4.0	20.7	19.1
2005	112.4	13.9	12.4	4.0	3.6	17.9	15.9
2010	109.0	11.8	10.8	3.7	3.4	15.6	14.3
2011	110.7	11.1	10.0	3.6	3.3	14.7	13.3

Note. ^aCalculated by author after rounding.

Source. Pension Benefit Guaranty Corporation. Pension Insurance Data Tables, 2012. Table S-33. Retrieved from www.pbgc.gov.

Demographic Changes

We are used to hearing about increasing life expectancy at birth. For DB retirement plans and for the PBGC, the more relevant measure is life expectancy at age 65. Increasing life expectancy is reported as good news. We all want to live longer. However, for DB pension plans and the PBGC (and Social Security) it is bad news. When retired participants and beneficiaries (surviving widows and widowers) live longer, they collect benefits for more years. This adds to the cost of the programs that pay them. Table 6 shows that life expectancy at age 65 for men increased from 14.0 years in 1980 to 18.0 in 2013. That is a whopping 28.6% increase. For women, the increase was from 18.4 to 20.5 (11.4%). Women live longer than men, but differential has been shrinking. In 1980, it was 4.4 years; in 2013, it was 2.5 years (at age 65).

Table 6.

Life Expectancy at Birth and at Age 65, Labor Force Participation Rates and Composition, Selected Years, 1980 to 2013.

	Life expectancy
	At birth		At age 65		Labor force participation rate		Composition of the labor force
Year	Male	Female	Male	Female	Male	Female	Male	Female
1980	69.9	77.5	14.0	18.4	77.4	51.5	57.5	42.7
1985	71.1	78.2	14.4	18.6	76.3	54.5	55.8	44.2
1990	71.8	78.9	15.1	19.1	76.4	57.5	54.8	45.2
1995	72.5	79.1	15.4	19.1	75.0	58.9	53.9	46.1
2000	74.0	79.4	15.9	19.0	74.8	59.9	53.5	46.5
2005	74.8	80.0	16.7	19.1	73.3	59.3	53.6	46.4
2010	76.1	80.9	17.6	20.2	71.2	58.6	53.3	46.7
2011	76.1	80.9	17.7	20.2	70.5	58.1	53.4	46.6
2012	76.4	81.1	17.9	20.4	70.2	57.7	53.1	46.9
2013	76.5	81.3	18.0	20.5
Additional years	6.6	3.8	4.0	2.1	−7.2	6.2	−4.4	4.2
% Increase	9.4	4.9	28.6	11.4	−9.3	12.0	−7.7	9.8

Source. For Life Expectancy: 2014 Social Security Trustees Annual Report. Table V.A3. Retrieved from www.ssa.gov. For Labor Force Participation Rate and Composition: U.S. Department of Labor, Bureau of Labor Statistics. Women in the Labor Force: A Databook. May 2014. Tables 1 and 2. Retrieved from www.dol.gov.

Another important development involves labor force participation rates (LFPRs). As also displayed in Table 6, the LFPRs of men and women, and consequently the composition of the labor force, has changed significantly. The big changes occurred in the 1960s and 1970s. However, during the period under discussion, the trends continued. Male labor force participation declined from 77.4 in 1980 to 70.2 in 2012 (−9.3%). Female LFPR grew form 51.5 in 1980 to 59.9 in 2000, down from a peak of 60.0 in 1999 (not shown). It has subsequently declined to 57.7 in 2012 (+12.0%).

The net effect of this “twist” in male and female LFPRs is captured in the change in the composition of the labor force. In 1980, it was 57.5% male and 42.7% female. In 2012, it was 53.1% male and 46.9% female. While most of us applaud the employment advances made by women, when their longer life expectancy is added to their increased LFPR and, hence, greater participation in DB pension plans, it exacerbates the PBGC’s problems.

As presented in Table 7, in 2003 there were 279,496 retired male PBGC payees. By 2012, there were 447,052, a 59.9% increase. During the same period, female retired payees had grown from 119,545 to 212,037, a 77.4% increase.

Table 7.

Retired Participants and Beneficiaries by Average Benefit Payment by Gender.

	Retired payees				Beneficiary payees
	Male		Female		Male		Female
Year	Number	Average monthly pension ($)	Number	Average monthly pension ($)	Number	Average monthly pension ($)	Number	Average monthly pension ($)
2003	279,496	601	119,545	248	3,520	178	54,899	279
2004	314,427	632	134,755	247	4,556	265	62,928	186
2005	418,532	641	264,684	245	5,827	233	90,327	195
2006	365,564	691	146,344	349	6,412	278	95,368	213
2007	370,502	706	143,369	352	7,066	284	108,788	229
2008	372,804	700	146,656	351	7,389	279	112,556	238
2009	432,634	772	174,998	437	8,252	283	127,023	252
2010	431,390	772	184,002	416	8,101	296	122,562	258
2011	453,188	745	199,821	401	6,504	233	115,012	279
2012	447,052	717	212,037	385	NA	NA	NA	NA

Source. Pension Benefit Guaranty Corporation. For 2003 to 2009: Pension Insurance Databook. For 2010 to 2012: Pension Insurance Data Tables S-24 and S-25. Retrieved from www.pbgc.com.

Retired male PBGC payees receive larger benefits than women. The disparity reflects the fact that women on average have historically earned less that men and have had fewer years of participation in pension plans. While the average monthly benefit of the men went from $601 in 1980 to $717 in 2012, a 19.3% increase that of women grew from $248 to $385, a 55.2% increase. With the closing of the pay gap, the future benefits of women will increase relative to those of men.

The experience of beneficiaries, as also portrayed in Table 7, is quite different. There are many more widows than widowers. In 2011, there were 6,504 male and 115,012 female beneficiary payees. The average monthly payment for the men grew from $178 in 2003 to $233 in 2011, a 30.9% increase. For the women it was the same in 2011 as it had been in 2003, $279.

Return on Investment

PBGC assets are held in “trust funds” and “revolving funds.” The trust funds hold the assets of trusteed pension plans and their investment earnings. They are held by custodial banks. The revolving funds contain the insurance premiums collected from plan sponsors.

The PBGC had a well thought-out investment policy.⁸ It may invest its assets in a wide array of financial products. There are sensible limits and prohibitions that require diversification and limit risk. In 2008, the PBGC changed its investment policy toward accepting more risk. It moved from a targeted 15% to 25% of its assets in equities to having 55% in equities and real estate (as opposed to fixed income bonds). The goal was to increase the PBGC’s return on investment. Financial experts criticized the move. Fortunately, most of the planned changes had not been executed by the time the financial markets collapsed in late 2008 and early 2009.

As of 2001, the overall investment balance policy of the PBGC was 70% fixed income and 30% equities. It is now 60% fixed income and 40% equities. That is aggressive for a governmental agency investing other people’s money. The PBGC was hurt by the recession of 2008 and with the low-interest policies of the Federal Reserve that followed. Market contractions reduce asset values and low interest rates increase the present value of future benefit obligations.

Table 8 reports the financial performance of the PBGC from 2007 through 2014 and the 8-year averages. The trust funds and the revolving funds did fairly well over the period. The total fund composite corresponds rather closely with the ERISA/PPA Portfolio benchmark established by the Pension Protection Act of 2006. Whether this is good enough or not is a value judgment that hinges on the balance between aggressive investing and fiduciary prudence. There have been recessions in 1981, 1991, 2001, and 2008, and there is sure to be another in the not-too-distant future (by 2018?). Hopefully, the PBGC will not be as exposed then as it is now.

Table 8.

Financial Performance of PBGC Trust and Revolving Funds, 2007 to 2013.

Year	Trust funds (%)	Revolving funds (%)	Total fund composite (%)	Total fund benchmark^a (%)
2007	9.5	2.0	7.2	7.5
2008	11.8	8.3	−6.5	−6.6
2009	14.3	9.8	13.2	11.1
2010	11.6	12.4	12.1	11.0
2011	3.6	8.9	5.1	5.1
2012	15.1	5.2	12.6	11.8
2013	5.4	−5.3	2.6	2.1
2014	9.3	4.5	8.0	8.0
8-Year average^b	10.1	5.7	6.8	6.3

Note. ^aThe ERISA/PPA Portfolio benchmark is a hypothetical portfolio with a 60% allocation to Standard & Poor’s 500 equity index and a 40% allocation to the Barclay’s Capital Aggregate fixed income index. It was added by the Pension Protection Act of 2006.

Calculated by author.

Source. Pension Benefit Guaranty Corporation. Annual Reports FY 2007 to 2014 inclusive. Unnumbered table titled “Investment Performance.” Pagination varies. Retrieved from www.pbgc.gov.

Declining Role of PBGC Insured Plans and Participants

The combined effect of the above has resulted in an important decline in the portion of the workforce participating in traditional DB pension plans. As indicated in Table 5, in 1980, when there were 74.9 million private sector wage and salary workers, 28.8 million (38.3%) were active participants in PBGC-insured single-employer plans. Another 8.2 million (10.9%) were in multiemployer plans. Thus, 37.0 million (49.4%) were active participants in PBGC insured plans.

By 2011, the picture had changed drastically. The number of private sector wage and salary workers had grown to 110.7 million while only 11.1 million (10.0%) were active participants in single-employer plans and 3.6 million (3.3%) were in multiemployer plans. That sums to 14.7 million (13.3%) active participants in total PBGC insured plans.

The decline in the number of plans (Table 4) and the decline in the number and percentage of active participants are related. Employers establish and maintain pension plans primarily to attract and retain employees. With over 60% of pension plan participants now either already retired or separated vested former employees, sponsors must wonder what they were getting for their money: annual required contributions and their PBGC insurance premiums. Such concerns have contributed to the massive shift from DB to DC plans beginning in the mid-1980s and to the recent “de-risking” development in the private sector.

A provision of the Pension Protection Act of 2006 that made lump-sum distributions cost-neutral with continuing to fund a DB pension plan became fully effective in 2012. Many employers, including some with very large pension plans (General Motors, Ford and Verizon Communications) responded by terminating pension plans through voluntary lump-sum distributions and the purchase of group annuity contracts from an insurance company for those participants who declined the lump sums. In 2012, the group annuity market had over 200 transactions totaling $36 billion.⁹ The de-risking development has been addressed elsewhere.¹⁰

Analysis

Single-Employer Program

The prognosis of the Single-Employer Program has recently improved, at least temporarily. Although the increases in PBGC flat and variable premium rates improved its net position from −$27.4 billion in 2013 to −$19.3 billion in 2014 and its funded ratio from 75.2 to 82.1 (Table 3), the longer-run picture is not encouraging. As more plans are terminated and few, if any, traditional DB plans are created, and as insurance premium rates continue to climb, something has to give. If things remain unchanged, by the estimate presented in Table 9, the 23,399 insured single-employer plans of 2013 will decline to 18,628 in 2020 and to 14,830 in 2025. Similarly, the 12.3 million active participants in single-employer plans in 2011 will decline to 8.2 million in 2020 and to 5.7 million by 2025.

Table 9.

PBGC Insured Plans and Active Participants With Estimates for 2015, 2020 and 2025 (Participants in Thousands).

	Single-employer		Multiemployer
Year	Plans	Active participants	Plans	Active participants
2000	35,373	17,728	1,744	4,648
2005	29,605	15,627	1,571	4,497
2010	26,377	12,627	1,475	4,032
2011	26,607	12,285	1,461	3,984
2012	24,215		1,448
2013	23,399		1,435
2020^a	18,628	8,200	1,247	3,640
2025^a	14,830	5,723	1,133	3,366

Note. ^aCalculated by author using linear regression and estimation for all years 2000 to 2013 for plans and 2000 to 2011 for participants.

Note. PBGC Insurance Data Table S-33 (source) provides active participant data for single-employer and multiemployer plans as a percentage of the private sector wage and salary workers. The author converted the percentages to numbers of participants.

Source. Pension Benefit Guaranty Corporation. Pension Insurance Data Tables S-31, S-33 and M-6. Retrieved from www.pbgc.gov.

Multiemployer Program

The Multiemployer Program is in bad shape. PBGC premium increases were to have been $13 per participant in 2015 and 2016. However, they were doubled to $26 (indexed) by the MPRA of 2014 (Table 1). By my estimate, the 1,435 multiemployer plans of 2013 will decline to 1,247 in 2020 and to 1,133 in 2025. The almost 4.0 million active participants as of 2011 will decline to 3.6 million in 2020 and to 3.4 million in 2025 (Table 9). The Multiemployer Program was on the brink of insolvency in 2014. Its net position (deficit) had fallen from −$8.3 billion in 2013 to −$42.4 billion in 2014 and its funded ratio from 17.2 to 4.0 (Table 3). Congress had to act.

The congressional response came in the form of the Multiemployer Pension Reform Act of (December) 2014. The MPRA was actually an amendment that became Division O of the Consolidated and Further Continuing Appropriations Act of 2015 (Pub. L. 113-235) passed by Congress on the eve of adjournment to keep the federal government from shutting down.

The MPRA allows the trustees of multiemployer plans in the newly-created “critical and declining status” (deep red zone) to suspend (reduce) accrued and vested benefits of active and inactive participants (including retirees and beneficiaries), even though they have not depleted all assets. It also allows plans not yet in the critical (red) zone to choose to enter it if its actuary certifies that the plan will be insolvent in any of the next 5 years.

There are various limits and restrictions to protect elderly retirees and indirectly protect low-benefit pensioners. Plans may not reduce benefits below that necessary to avoid insolvency indefinitely and not below 110% of the PBGC benefit guarantee level. The guarantee for a participant with 30 years of service is $12,870 per year. Most retired participants of insolvent plans receive much less. Plans may not reduce the benefits of disabled participants and those age 80 and over. For participants aged 75 to 79 the cuts will be phased in.¹¹ It is doubtful that the MPRA will provide the long-term relief needed to save the Multiemployer Program.

The MPRA also doubled the multiemployer premium rate for 2015 and 2016 from $13 to $26 per participant. It directed the PBGC to report to Congress by June 1, 2016, on the adequacy of the $26 premium. If it is found to be inadequate to save the multiemployer program, the PBGC is to recommend a higher rate that will be. All of this begs the question: Is there anything that can be done to save the PBGC? What are the alternatives at this time?

Premium Rates

PBGC premium rates have increased significantly since 2006 (Table 1). In 2016, single-employer plans will pay a flat rate of $64 per participant plus $29 per $1,000 of unfunded vested liability up to a cap of $500 per participant. Multiemployer plan sponsors will pay $26 per participant in 2015 and 2016. After 2016, all premium rates will be indexed to the NAWI and will increase automatically as wages increase. Wage rates almost always increase more than prices due to productivity advances.

Plan sponsors are already terminating traditional DB pension plans in droves. One of the reasons is the cost of PBGC insurance. We do not yet know the full extent to which the recent premium rate increases and indexing will have on plan terminations and insolvencies. We do know, however, that there will be more of them, probably many more.

Risk-Adjusted Premiums

It has been proposed that the PBGC be allowed to adjust its premium rates for risk. That is what insurance companies do. They also decline to insure really bad risks. The PBGC does not have either option. Congress sets across-the-board premium rates and the PBGC is required to insure all private sector DB pension plans.

It is unfair that sponsors of the many well-funded and well-managed pension plans should have to subsidize those that are not. Underfunding a DB pension plan is not a chance event that affects all equally and lends itself to risk pooling and probability theory. It is the result of human decision making. However, if the PBGC were to be allowed to risk-adjust premiums, it would mean that plans that are already seriously underfunded would pay higher rates, which would result in even more terminations. While logical, it appears unlikely that premiums on well-funded and well-managed plans would be reduced. That would make things worse.

Benefits

Reducing benefit guarantee levels or benefit amounts also has a certain appeal. However, with a single-employer program fixed mean monthly benefit of $559 and a median of $284, as of 2012, the cut in guarantee levels would have to be draconian to have much of an impact. The PBGC does not publish mean and median benefits for multiemployer plans, other than for the 10 plans trusteed before the MPPAA of 1980. However, with a maximum annual guarantee of $12,870 for participants with 30 years of service, reductions would have to be drastic to have much of an impact. There are simply not enough payees at the top of the distribution to make a small reduction meaningful. In the single-employer program, for every participant payee receiving more than the median benefit, someone receives less. The distribution has a decided left skew. Could anyone in good conscience propose reducing an earned median pension benefit of $3,408 per year? The same applies to the multiemployer plans receiving PBGC loans.

Investment Returns

The PBGC has already changed its investment portfolio from 70% fixed income and 30% equities in 2011 to 60% fixed income and 40% equities. In the long run, equities earn more than bonds (roughly twice as much). However, equities experience more fluctuations in value in the short and intermediate run. There is a relationship between return and risk. How much more short and intermediate term investment risk can and should the PBGC take?

Government Bailout

The final alternative, bailing out the PBGC with general fund dollars would be a major departure from a founding principle of ERISA: that the PBGC should be self-supporting. It would be patently unfair to ask the taxpayers, most of whom do not have significant lifetime retirement benefits (other than Social Security) to bail out those who do. However, given that the Congress enacted the ERISA 40 years ago to protect retirement income benefits, and has strengthened its funding requirements a number of times, and created the PBGC to be the ultimate protector of those benefits, many of us thought the federal government would step in to save the PBGC if it ever approached insolvency. We were wrong.

The recently enacted MPRA appears to have answered the question. No. The Congress and the U.S. Treasury will not come to the aid of an insolvent PBGC.

Conclusion

The PBGC is in serious trouble and there are no ready solutions for its problems. Imposing more cost on plan sponsors through additional funding requirements and increased insurance premium rates has its limits and those limits may have already been exceeded. Increasing investment returns by accepting more portfolio risk is fraught with danger. There will be another recession in the not-too-distant future. Then what?

As sponsors continue to terminate traditional DB pension plans (de-risk) and as the ratio of active participants to inactive retired and separated vested participants continues to worsen, the PBGC will find it increasingly difficult to perform its primary function of protecting the vested retirement benefits of participants and beneficiaries. At some point it will enter a downward spiral that will not end well.

The plight of the PBGC is that, in the absence of a federal bail-out (which now seems unlikely), whatever it tries to improve its short-run situation will only worsen its long-term problems.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

Notes

Author Biography

John G. Kilgour is professor emeritus in the Department of Management at California State University, East Bay. He is a long time and frequent contributor to Compensation & Benefits Review.