Tag Archives: PBGC

Paving over pension liabilities, again

Public sector pensions are subject to a variety of accounting and actuarial manipulations. A lot of the reason for the lack of funding discipline, I’ve argued, is in part due to the mal-incentives in the public sector to fully fund employee pensions. Discount rate assumptions, asset smoothing, and altering amortization schedules are three of the most common kinds of maneuvers used to make pension payments easier on the sponsor. Short-sighted politicians don’t always want to pay the full bill when they can use revenues for other things. The problem with these tactics is they can also lead to underfunding, basically kicking the can down the road.

Private sector plans are not immune to government-sanctioned accounting subterfuges. Last week’s Wall Street Journal reported on just one such technique.

President Obama recently signed a $10.8 billion transportation bill that also included a provision to allow companies to continue “pension smoothing” for 10 more months. The result is to lower the companies’ contribution to employee pension plans. It’s also a federal revenue device. Since pension payments are tax-deductible these companies will have slightly higher tax bills this year. Those taxes go to help fund federal transportation per the recently signed legislation.

A little bit less is put into private-sector pension plans and a little bit more is put into the government’s coffers.

The WSJ notes that the top 100 private pension plans could see their $44 billion required pension contribution reduced by 30 percent, adding an estimated $2.3 billion deficit to private pension plans. It’s poor discipline considering the variable condition of a lot of private plans which are backed by the Pension Benefit Guaranty Corporation (PBGC).

My colleague Jason Fichtner and I drew attention to these subtle accounting dodges triggered by last year’s transportation bill. In “Paving over Pension Liabilities,” we call out discount rate manipulation used by corporations and encouraged by Congress that basically has the same effect: redirecting a portion of the companies’ reduced pension payments to the federal government in order to finance transportation spending. The small reduction in corporate plans’ discount rate translates into an extra $8.8 billion for the federal government over 10 years.

The AFL-CIO isn’t worried about these gimmicks. They argue that pension smoothing makes life easier for the sponsor, and thus makes offering a defined benefit plan, “less daunting.” But such, “politically-opportunistic accounting,” (a term defined by economist Odd Stalebrink) is basically a means of covering up reality, like only paying a portion of your credit card bill or mortgage. Do it long enough and you’ll eventually forget how much those shopping sprees and your house actually cost.

Some private sector pensions also face funding trouble

A new report by the Pension Benefit Guaranty Corp (PBGC) warns that while the market recovery has helped many multiemployer pension plans improve their funding there remain some plans that,”will not be able to raise contributions or reduce benefits sufficiently to avoid insolvency,” affecting between 1 and 1.5 million of ten million enrollees.

Multiemployer plans are defined as those which unions collectively bargained for, with multiple employers participating within an industry (e.g. building, construction, retail, trucking, mining and entertainment). They are also known as Taft-Hartley plans. Multiemployer plans grew out of the idea of offering pension benefits for unionized employees in transient kinds of work such as construction. These plans have been in trouble for awhile due to a variety of factors. Many plans have taken measures by increasing contributions and in a few cases cutting benefits according to GAO. But those steps have not been nearly enough to fix the growing shortfalls.

When a PBGC-insured pension plan goes insolvent beneficiaries are only guaranteed a fraction of their benefits. Those funds come from the premiums paid by remaining plans. The projected deficit for the ailing multiemployer plans range from $49.6 billion to $79.6 billion in 2022. By contrast the PBGC reports that single employer plans fare better with the current funding deficit of $27.4 billion narrowing to $7.6 billion by 2023.

Source: FY 2013 PBGC Projections Report

 

Is the Pension Benefit Guaranty Corporation the Next Bailout?

Created in 1974 by Congress, the Pension Benefit Guaranty Corportion (PBGC) is a government agency that protects private sector pensions for workers in financially failing companies. According to The Center for Public Integrity,the PBGC is itself in need of rescue. In addition to having insufficient money to bail out private pensions, the Office of Inspector General gives the PBGC an “F” in an audit of its internal financial controls.

The agency cannot confirm investment revenue figures reported by the independent contractors hired to lend securities on its behalf. The result is the PBGC often gives erroneous information to Congress. Though the agency is self-financing through insurance premiums paid by the companies that operate defined benefit plans, the PBGC is in deficit for $21.9 billion. At the same time the PBGC’s potential obligations to cover pensions in faltering companies tripled last year to $168 billion. It’s an ongoing problem. In 2006 the agency had a deficit of $23 billion. As GMU finance professor Anthony Sanders notes, the PBGC is a model that cannot be sustained. Another reminder that the ultimate guarantor of government guarantees is the taxpayer.