The Pension Benefit Guaranty Corporation—the government
organization that insures private pension plans—announced this month that its
deficit grew to $36 billion, but some industry groups have taken issue with
that number, saying it is artificially inflated.
The PBGC has been in trouble since the Great Recession hit.
Add artificially low interest rates, a volatile stock market and the many
corporations filing for bankruptcy and it has been the perfect storm for the
PBGC.
Josh Gotbaum, director of the PBGC, said in the agency’s
2013 annual report that its premiums are “both too inflexible—so that some
plans are unfairly paying for the risks of others—and too low to cover PBGC’s
benefit guarantee levels.”
Multiemployer plans have become a major issue, with many of
them suffering due to economic changes and investment market declines.
“Although the Employee Retirement Income Security Act
(ERISA) allows some flexibility to avoid insolvency, for many plans that won’t
be enough. Without additional changes, we project that plans covering hundreds
of thousands of people will fail,” Gotbaum said. “Sadly, PBGC’s own funding is
itself inadequate to pay benefits if their plans fail.”
The Government Accountability Office has listed the PBGC as
at-risk since 2003, in part because unlike other government agencies, like the
Federal Deposit Insurance Corporation, it doesn’t have the power to set its own
premiums. It must rely on Congress to set premiums for Congress has repeatedly
raised PBGC’s premiums, but they remain too low to fund the PBGC’s obligations,
said Gotbaum. He did admit that the organization still has very substantial
assets, so it won’t run out of money for a few years. He predicted its
multiemployer program would become insolvent within 10 to 15 years.
The GAO said in a report released Nov. 7 that the PBGC could
benefit from a redesigned premium structure that could better align rates with
risk from plan sponsors. It recommended that the PBGC continue to explore
possible redesign options.
The American Benefits Council, a national trade association
for companies concerned about federal legislation and regulations that affect
all aspects of the employee benefits system, has been very vocal in its
disagreement with the assumptions PBGC used to come up with its $36 billion
deficit figure.
The problem is that the PBGC wasn’t founded to operate as an
insurance company. It was set up as a safety net so that employees of defunct
companies wouldn’t lose their retirement benefits, said Lynn Dudley, senior
vice president retirement and international benefits policy for the American
Benefits Council (ABC).
When figuring out its deficit, the PBGC uses as its main
assumption the immediate payout of all of the obligations that are its
responsibility, she said. “They don’t do that. They pay them out over 50 or 60
years. These are not obligations that are paid immediately. Why they would
assume they would need to go out and [buy] an annuity for every single person
on a single day….it is not the way it works,” she said.
“The PBGC’s deficit is a ‘snapshot’ measure of current
assets minus liabilities. As a result, it does not accurately reflect the
funded status of active ongoing plans,” said James Klein, president of the ABC
in a statement. “All pension fund liabilities, including the PBGC’s, are
overstated by the historically and artificially low interest rates of recent
years. Keeping interest rates low is good policy to stimulate the economy, but
it has the perverse effect of making very secure pension funds and the PBGC’s
own situation appear underfunded.”
By continually raising premiums, the ABC is concerned that
companies will just opt out of the system. They will stop paying into the PBGC
because their payments are so huge they won’t be able to participate anymore.
In December 2012, the Social Security Administration asked
the Retirement Research Consortium—three multidisciplinary centers housed at
the University of Michigan, Boston College and the National Bureau of Economic
Research—to evaluate the data, assumptions and methods underlying models of the
PBGC’s pension plan insurance programs and related models of pension funding
and sustainability.
In response to the SSA request, the National Bureau
of Economic Research (NBER) and the Brookings Institute conducted an
analysis of the PBGC’s Pension Insurance Modeling System (PIMS) and found that
it was state-of-the-art when it was first developed 20 years ago. That said,
several components of the model haven’t been updated to reflect the
availability of new tools, new insights from academic literature or even new
data, the report stated.
It also found that some of the model documentation is
internally inconsistent and outdated and the process for updating data and
model parameters appears ad hoc to outside observers. It also found that there
does not appear to exist any publicly available, systematic inventory of the
robustness checks that have been performed. Other long-term models that are
important to federal programs, like the actuarial models used in the Social
Security and Medicare programs, regularly undergo an external review by a technical
panel of outside experts.
The PBGC also needs to take into account risk factors
arising from the macroeconomic environment that are likely to substantially
understate the degree of fiscal risk to PBGC’s insurance programs. For
instance, during economic downturns it is reasonable to expect more plan
sponsors to experience financial distress and more plans to be underfunded. The
PIMS model doesn’t account for negative or positive extremes, the report said.
“Recognizing the true economic costs of these correlated
risks and how they affect the broader fiscal position of the U.S. government,
therefore, has potentially important implications for program design, the
average level of premiums, the question of whether to risk‐adjust
premiums, and other important policy parameters which are well beyond the scope
of this narrow technical review of the PIMS model,” the report’s authors said.
The Pension Research Council of the Wharton School at the
University of Pennsylvania also reviewed the PBGC’s Pension Insurance Modeling
System. It believes that the agency could incorporate changes into its model
that would improve the entire system, including the incorporation of mortality
risk; including new asset classes, like commercial real estate, private equity
funds, infrastructure and hedge funds, that are typically found in defined
benefit plan portfolios; developing a more complex model for the term structure
of interest rates and incorporating an option value approach to pricing the
insurance provided.
The PBGC also could do more to communicate the range of
uncertainty and potential for problems associated with the agency’s financial
status, the report found. This could include additional information like an
intermediate, optimistic and pessimistic set of projected outcomes, as well as
the expected date of exhaustion for assets backing pension benefits insured by
the PBGC.
Source: Benefits
Pro
No comments:
Post a Comment