Thursday, December 2, 2010

IMHO: Does the PBGC Understand Why it Exists?

The Pension Benefit Guaranty Corporation (PBGC) was formed by ERISA in 1974. While I wasn't in the benefits business then, my understanding is that the agency was formed to protect private pensions in much the same way as the FDIC protects certain bank accounts.Similar to the FDIC, the PBGC protects pensions up to certain limits.

Yesterday, an American Benefits Council consultant, Kenneth Porter, testified before the Senate Health, Education, Labor and Pensions Committee (HELP) that the PBGC may be doing just the opposite. I largely agree with Mr. Porter's testimony. You can read a brief summary of it here: .

I will preface by saying that I have a number of friends who work at the PBGC. If they happen to read this, some will certainly not like my comments. But, it's MY blog, and that gives me the opportunity to express my opinion.

At the same times that private pensions have been very well funded, the PBGC has reported little or no shortfall in its annual report. When pensions have been poorly funded, the PBGC has reported larger shortfalls. DUH!!! (sorry for the 14-year old interlude there). Shouldn't this be the case? And, if this is the case, shouldn't the PBGC be hedging against this sort of obligation? Instead, again in my opinion, the PBGC has become part of the problem.

To my understanding, each major pension reform since 1987 has had major PBGC influence. Look at some of the additions to the Internal Revenue Code and or ERISA:

  • The deficit reduction contribution and additional funding charge
  • The concept of current liability
  • The variable rate premium (a good addition, in my opinion)
  • The elimination, in my opinion, of reasonable actuarial cost methods by the Pension Protection Act (PPA) of 2006. 
  • The imposition of participant notices (not very useful, in my opinion as a plan participant) under ERISA 4011
  • The burden or ERISA 4010 notification
Does it really protect pensions to continually increase the maintenance burden on plan sponsors? Or, does it protect the PBGC by having fewer participants in fewer private pensions accruing benefits?

As a participant, I'd rather have the opportunity to accrue additional benefits even if those additional accruals don't have PBGC protection. Perhaps I won't ever get them, but at least I have a chance.

Shortly after the passage of PPA in 2006, I wrote to one of my US senators who was one of the co-sponsors of the Act and was instrumental in getting certain provisions into the Act that did help to preserve pensions and jobs in my current home state. I praised him for his work on behalf of that significant employer and others like it. But, I asked him in the same letter about how the Act actually preserved pensions. His reply focused on how PPA would serve to strengthen the PBGC.

Say what?

Four plus years later, my observation is that companies continue to freeze and terminate private pensions. To me, "pension protection" is not just about protecting accrued pensions, it's about protecting future pensions, and in my opinion, PPA under PBGC's influence has failed miserably at that.

Before departing for a different topic, I must give praise to the PBGC where it's due. In recent years, the PBGC has much more aggressively taken over private pensions to assure that most participants will get the benefits that they have earned. But, that is little solace to all those participants who are no longer accruing benefits because legislation over the last 20+ years has convinced their employers to cease providing those pensions.

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