* Numbers may not
add due to rounding.
In 2007, as in previous years, the PBGC engaged in a number of activities to
safeguard the pension insurance system, including plan risk assessments, plan
monitoring, and negotiation and litigation, to limit risk exposure and losses to
pension plan participants and the PBGC. PBGC monitored some 2,200
controlled groups, some 3,600 plans, and almost 500 bankruptcy cases. The
PBGC takes an active role in corporate bankruptcy proceedings on behalf of
workers whose pension plans are not fully funded. The PBGC encourages plan
sponsors to continue rather than terminate their pension plans. When a
plan is terminated, the PBGC pursues recoveries of the underfunding from the
plan sponsor and other related companies that are liable.
The steps PBGC has taken to protect pensions that could be adversely affected
by corporate transactions or bankruptcy have made a real difference to plan
participants and PBGC. And the companies that cooperated in making good on their
pension promises have reason to be proud.
- Since 2005, the PBGC has worked with 13 auto parts companies that have
emerged successfully from Chapter 11 protection without terminating their
pension plans. For example, this year, Dana Corporation (53,000 participants),
and Dura Automotive (4,300 participants) made contributions required by ERISA
during bankruptcy and kept their plans intact. Other examples in prior
years are Federal Mogul and Tower Automotive.
- Last spring the PBGC initiated discussions with Daimler and Cerberus that
led to additional protections for Chrysler's pension plans (259,500
participants). The plans received $200 million in contributions beyond
what is required by ERISA, and Daimler will provide a $1 billion guarantee for
up to five years if the plans terminate.
- Delphifs bankruptcy proceedings remain ongoing, and PBGC is continuing its
efforts to protect Delphifs pension plans (86,500 participants) and achieve
the goal of a successful reorganization. On September 12 Delphi announced an
agreement with General Motors under which Delphi will transfer $3.4 billion of
net pension liabilities from Delphifs hourly pension plan to GMfs hourly
pension plan. The agreement is subject to bankruptcy court
approval. The bankruptcy court may hold a hearing this week.
As the insurer of America 's defined benefit pension plans, the PBGC will
continue to negotiate protection for workers and retirees in transactions like
those described above. These safeguarding activities provide significant
protection to the defined benefit insurance system and all its stakeholders.
In 2005, the Administration proposed a comprehensive package of pension
reforms to shore up the PBGC and strengthen funding in ongoing defined benefit
plans. During 2006, legislation incorporating some of these reforms was
signed into law: the Deficit Reduction Act of 2005 (gDRA 2005h), enacted on
February 8, 2006, and the Pension Protection Act of 2006, enacted August 17,
2006.
The provisions of the 2006 legislation that have the most immediate effect on
PBGC are the premium provisions. The new law increased both the
single-employer and multiemployer flat-rate premiums.
Until the enactment of DRA 2005, the flat-rate premium had remained unchanged
for single-employer plans since 1991 and for multiemployer plans since 1989. DRA
2005 changed the per-participant flat-rate premium for plan years beginning in
2006 to $30 (from $19) for single-employer plans and to $8 (from $2.60) for
multiemployer plans, and provides for inflation adjustments to the flat rates
for future years. The inflation-adjusted per-participant flat-rate premium
for 2008 is $33 for single-employer plans and $9 for multiemployer plans.
PPA 2006 kept the variable-rate premium paid by single-employer plans at $9
per each $1,000 of unfunded vested benefits and conformed the measurement of
underfunding to the PPA changes to the plan funding rules. PPA 2006 also
eliminated the full-funding limit exemption from the variable-rate premium,
which was a loophole under prior law.
The Presidentfs FY 2009 budget again called upon Congress to grant PBGCfs
Board of Directors the ability to adjust premiums in order to eliminate PBGCfs
$14 billion deficit over a reasonable period of time and better safeguard
workersf benefits. Moreover, under current law, PBGC is required to charge the
same premiums regardless of the financial health of the planfs sponsor.
Normally, insurance is provided by institutions that are able to
underwrite risk, and PBGC should be permitted to assess its premiums in this
way. Some level of risk-based premium-setting authority would allow the PBGC to
quantify and be better prepared to confront the risks it faces.
DRA 2005 created a new eetermination premiumff that is payable in the event
of certain distress and involuntary plan terminations of underfunded
single-employer plans that occur after 2005.
The premium is $1,250 per participant per year and is payable for three years
following the termination. For plans that terminate while the sponsor is
in bankruptcy, payment is deferred until the sponsor emerges from
bankruptcy. Flatware maker Oneida Ltd., which terminated an underfunded
plan while in a chapter 11 reorganization proceeding, asserts that all of its
pension plan obligations, including the termination premium, were discharged in
bankruptcy. The 2nd Circuit Court of Appeals has agreed to hear PBGCfs
argument that the Deficit Reduction Act of 2005 requires payment of the
termination premium. The appeals court may take up the case by year end.
Funding
PPA 2006 contains funding reforms that first apply to contributions for plan
years beginning in 2008. We look forward to these reforms taking
hold but it is too early to tell what effect they will have on the funded status
of plans that constitute reasonably possible terminations.
While generally trying to improve plan funding, Congress also provided
funding relief to certain airlines, allowing them to defer the accelerated
funding requirements. This funding relief resulted in certain large plans
previously classified as probable terminations being changed to the reasonably
possible classification in FY 2006. If PBGCfs deficit were calculated without
regard to PPA 2006 airline relief provisions, PBGC estimates that its net
deficit for FY 2007 would have been approximately $8 billion higher (assuming
2006 underfunding levels for the specific airline plans remained constant).
The airline underfunding remains a potential
claim against the insurance program that may be expected to grow over
time.
Regulations
PPA 2006 and DRA 2005 changed premiums, guarantee
rules, reporting and disclosure requirements, and PBGCfs missing participants
program. During FY 2007, the PBGC began developing and drafting the
numerous rules that would amend its regulations to comply with the changes. In
developing these regulations, the PBGC seeks to ease and simplify employer
compliance whenever possible, taking into account the needs of small businesses.
In line with these principles, the PBGC published two final rules implementing
premium changes.
Together, these rules implemented the new termination premium and changes to the
flat-rate and variable-rate premiums discussed above, and a new cap on the
variable rate premium for plans of small employers. PBGC also published
procedures under the PPA provision allowing certain single-employer plans
(generally union staff plans) to elect to be multiemployer plans.
In FY 2008, the PBGC published proposed rules on
PPA changes to annual financial and actuarial information reporting under ERISA
section 4010, multiemployer withdrawal liability, disclosure of termination
information, and the guarantee snapshot date for plans that terminate while the
sponsor is in bankruptcy.
In FY 2009 PBGC expects to publish proposed rules
on other PPA provisions, including the expanded missing participants
program.
Distress and involuntary termination
Underfunded plans terminate in either a distress termination (initiated by
the plan sponsor) or an involuntary termination (initiated by PBGC). In
either case, with court approval, PBGC becomes trustee of the plan, taking over
plan assets, liabilities, and records.
PBGC immediately notifies plan participants upon becoming trustee and begins
gathering the information needed to determine the benefits to which participants
are entitled under the plan and the information needed to compute amounts
payable under ERISA. The amount to which participants are entitled is the
amount guaranteed by the insurance program, plus any additional amounts that can
be paid from allocated plan assets or recoveries from employers.
In order to avoid any interruption in benefit payments, PBGC continues
payments to retirees while it is making these computations. As quickly as
possible, PBGC adjusts benefits and begins paying gestimated benefitsh until it
can determine the exact amounts due under the law (gfinal benefitsh). Because
these early payments are based on estimates, participants may be paid more or
less that they are allowed to receive by law. If a participant
receives more than allowed by law, future benefits are reduced accordingly. To
avoid financial hardship for participants, the reduction is no more than 10
percent of the final monthly benefit and no interest is charged. When
repayment is complete, monthly payments increase to the full amount. If a
participant or beneficiary dies during repayment, further repayment is
waived. If a participant receives less than they are entitled to by law,
PBGC pays the difference to the participant in a lump sum with interest.
PBGC works hard to communicate with participants, holding participant
meetings, sending individualized letters, and newsletters. However, it is
still difficult for a retiree to learn that a pension he has worked years to
earn will not be paid in full because the employer has not fully funded what was
promised and the amount promised exceeds the legal limits that PBGC can pay.
PBGC is striving to shorten the time it takes to make final benefit
determinations and thereby minimize payments in excess of legal limits. We
have made great improvements over the years, but there is room for more
improvement. Similarly, we are working to improve communications to help
manage participant expectations.
Standard termination
In order to terminate in a gstandard termination,h the plan must pay all
benefits promised, including non-vested benefits. The plan administrator
must certify to PBGC that this requirement has been met. If the plan
administrator is unable to locate a participant, provision must be made for
payment of the benefit. Under the PBGCfs Missing Participants program,
which was established by Congress about twelve years ago, the plan must send
money to PBGC or purchase an annuity from an insurance company and provide PBGC
information about the annuity purchase so that, if the individual is located,
the pension can be paid.
Currently PBGC has $9.3 million in unclaimed benefits under the Missing
Participants program and $195.3 million in unclaimed benefits for participants
in PBGC-trusteed plans. PBGC conducts repeated searches for all
individuals with unclaimed benefits and posts their names in a Pension Search
Directory on the PBGC web site. As of mid FY 2007, PBGC had paid $137
million to individuals in the pension search program.
Missing Participants Program Expansion
PPA 2006 provides for expansion of the Missing Participants program to cover
terminating private-sector defined contribution plans and terminating
multiemployer plans. Under PPA 2006 the expanded program would be
effective following issuance of final regulations. PBGC is currently
developing proposed regulations for the expanded program.
PBGC has total assets of $68.4 billion, of which $55 billion are investible
assets. How those funds are invested is a very significant factor in the
ability of the Corporation to meet its long-term obligations to the people who
look to us for payment of benefits.
PBGCfs investment policy was due for Board review in February 2008, so in
mid-2007, the PBGC initiated an independent review of PBGCfs investment policy
in light of PBGCfs financial condition and long-term financial needs. We hired
an independent consultant that had never worked with PBGC before to conduct a
comprehensive review of our long-term liabilities and our asset allocation. This
process included the consideration of dozens of possible portfolios under
thousands of possible scenarios. During the process, our consultant or PBGC
officials met or consulted multiple times with the PBGC Advisory Committee and
the PBGC Board Representatives.
After full consideration, PBGCfs Board of Directors unanimously adopted a new
diversified investment policy on February 12, 2008.
Our consultants calculations concluded that the prior policy gave us only a
19% chance of getting out of our deficit in the next ten years, and that the new
policy would give us a 57% chance of achieving that goal. The new policy is
designed to take advantage of the PBGCfs long-term investment horizon, and will
allocate 45 percent of Corporation assets to equity investments, 45 percent to
fixed income, and 10 percent to alternative investments such as private equity.
This strategy aims at generating better returns that provide a greater
likelihood that the Corporation can meet its long-term obligations.
Evaluation Process
In the months leading up to the adoption of the new investment policy, the
Corporationfs independent consultant conducted a comprehensive review of the old
investment policy and numerous alternative policies. The review included all
aspects of PBGCfs assets, liabilities, constraints, contingent liabilities, and
premium structures, and evaluated PBGCfs current and alternative investment
policies over 5-, 10- and 20-year periods.
The process that the PBGC conducted to arrive at the conclusion to alter the
Corporationfs investment policy involved a thorough assessment of PBGCfs
long-term obligations to plan participants and beneficiaries, exhaustive debate
and discussion among numerous constituents, and in-depth analysis by leading
industry experts. At the inception of the process, the Corporationfs long-term
objective and guiding principles were agreed to and documented by several key
constituents including Representatives of the Board. This was followed by a
close examination of the characteristics of the Corporationfs obligations,
including duration and key risk factors. A thorough review of the capital market
opportunities then explored a wide range of investment policy alternatives. The
potential performance of these alternatives and the Corporationfs obligations
were analyzed in the context of 5,000 economic scenarios over 20-year periods
for each portfolio considered. Results across the full range of scenarios were
analyzed to identify both expected and worst case environments to gain a
thorough understanding of the range of outcomes for the various policy
alternatives. The new investment policy was determined to offer the most
appropriate balance of liquidity, downside protection, and long-term return
potential relative to the Corporationfs obligations.
The consultant worked closely with various PBGC departments to understand the
underlying nature of PBGCfs current and contingent liabilities, cash flow
requirements, investment time horizon and investable universe.
The consultantfs approach fully considered the unique characteristics of
PBGCfs liabilities, including the particular risks associated with the
contingent liabilities, which are the most significant and uncertain the PBGC
faces. The consultant utilized PBGCfs benefit payment liability distribution,
and contingent liability and premium projections from the Corporationfs Pension
Insurance Modeling System (PIMS) model in order to develop a detailed projection
of PBGCfs contingent and trusteed liabilities and benefit payments. Furthermore,
the PIMS model also includes projections of contingent liabilities, benefit
payments and assets that utilize the consultantfs capital market assumptions,
including long-term inflation, real interest rates, and market returns. These
assumptions (long-term return, risk and correlations for all asset classes) were
used to run thousands of simulations quantifying their impact on PBGCfs assets,
liabilities, funded status, risk and return under a variety of economic and
market conditions. The model calculated the range of possible outcomes for each
portfolio measured against PBGCfs known and contingent liabilities.
The new PBGC investment policy – 45 percent equity, 45 percent fixed income,
and 10 percent private equity and other alternative investments – involves a
measured diversification of the portfolio to generate higher returns over the
PBGCfs long-term investment horizon. This change better enables the Corporation
to meet its long-term obligations.
Portfolio Rebalancing
The PBGC will seek to rebalance the investment portfolio at least
semi-annually in order to keep its asset allocation consistent with this
Investment Policy. The specific timing and size of the rebalancing process will
depend upon the liquidity needs of the Corporation, the cost of the rebalancing,
anticipated receipt of assets from newly trusteed plans and projected premiums.
Implementation
PBGC has developed a plan for gradual implementation of the new policy to
prevent any disruptions in financial markets. The Board Representatives
have been deeply involved in crafting the new investment policy and will
continue to oversee its implementation. I have established a new Chief
Investment Officer position responsible for putting the new investment policy
into place and overseeing the Corporationfs investment portfolio. The Chief
Investment Officer will take the lead in forecasting changes in volume, fund
mixes and scheduled maturities of investments and will supervise the
Corporationfs investment managers.
PBGC is making various operational improvements, some of which I have already
noted. In July PBGC was removed from the OMB Management Watch List because
of the agencyfs sustained efforts to improve IT project management and to
resolve outstanding IT security deficiencies. We also embarked on a
program to make constant improvement our goal and part of PBGCfs corporate
culture. The program is being met with enthusiasm by PBGCfs
employees. I should note that PBGC always earns high marks in its customer
service surveys. PBGC also is rated as one of the top 10 small
federal agencies to work for, which also reflects the shared customer focus of
its employees and management. We filled management vacancies and are
working on succession planning and the new performance management system.
PBGC received its 15th consecutive unqualified audit opinion for FY
2007 and is currently working on achieving its 16th for FY 2008.
Companies that sponsor pension plans have a responsibility to live up to the
promises they have made to their workers and retirees. But when a company can
not keep its promises, workers and retirees need a strong insurance program as a
safety net. We are building on the 2006 reforms and making internal
improvements to strengthen the safety net.
Thank you, Mr. Chairman. I would be happy to answer questions.
Additional
information on PIMS and the assumptions used in the model are available in
PBGCfs Pension
Insurance Data Book 1998, pages 10-17, which also can be viewed on the PBGCfs
Web site at
www.pbgc.gov/publications/databook/databk98.pdf