The government agency that insures private sector pensions and pays out benefits if the plans fail now has the largest deficit in its 37-year history. The Pension Benefit Guaranty Corporation deficit increased to $26 billion at the end of fiscal year 2011, up from $23 billion in 2010.
The agency assumed responsibility for the retirement benefits of 57,000 people in newly failed traditional pension plans in 2011. The PBGC stepped in to cover the benefit promises of 152 underfunded single-employer pension plans that terminated over the past year, including those at Alabama Aircraft Industries, Harry & David, Johnson Memorial Hospital, and Wolverine Tube, Inc. The agency also offered $115 million in financial assistance to 49 insolvent multiemployer pension plans.
The PBGC says lower interest rates used to measure benefit payment obligations and anticipated increases in multiemployer financial assistance contributed to the worsening deficit. “Most pension plans are sound. When we say we expect to see plan failures we expect to see a minority of plans fail,” says PBGC Director Joshua Gotbaum. “The vast majority of pension plans are not going to come to the PBGC.”
The PBGC has $81 billion in assets to cover $107 billion worth of obligations to the 1.5 million people it pays retirement benefits to. “When the pension plans can no longer pay benefits we step in and we pay benefits,” says Gotbaum. “We’re here to provide retirement security. We see people at a time when they are not secure.”
Gotbaum says the PBGC, which does not receive taxpayer funds, needs to increase the premiums paid by companies in order to reduce the deficit. “Premiums are going to need to make up that difference,” says Gotbaum. However, the American Benefits Council, a trade group for companies that administer or service employer-sponsored benefit programs, says a premium increase is unnecessary because the deficit is largely attributable to low interest rates. “There is no justification to raise their premiums to help close the deficit,” says James Klein, president of the council.
The agency also worked with 19 companies in bankruptcy to maintain about $2 billion in pension promises to more than 74,000 workers and retirees, including Visteon, Chemtura Corp., and FairPoint Communications Inc. “It is always the case that it is better to keep the plan intact and in the hands of the original employer that promised it,” says Gotbaum.
The PBGC paid nearly $5.5 billion in benefits to 873,000 retirees and their surviving beneficiaries in more than 4,300 failed pension plans in 2011. Another 628,000 current and former employees will receive benefits from the PBGC in the future.