PBGC’s 2014 Annual Report

PBGC's 2014 Annual Report

On November 17, 2014, the PBGC released its FY 2014 Annual Report (PBGC operates on a September 30 fiscal year).

PBGC’s annual reports have in recent years, to some degree, become lobbying instruments, highlighting PBGC’s deficit and arguing for changes in PBGC’s premium structure. The size of the PBGC deficit, highlighted in the 2013 annual report (which we discussed in this article), was the basis for the PBGC premium increase that was part of last year’s year-end budget deal. In a set of Q&As released in connection with that budget legislation, Paul Ryan (R-WI), Chairman of the House Budget Committee, said:

Today, the PBGC faces a $36 billion unfunded liability. Increasing the premiums will begin to reduce that unfunded liability. Otherwise, the PBGC could be unable to meet its obligations to pensioners or all taxpayers would have to bail out private-sector pension plans.

In this article we review key data in the 2014 Annual Report describing PBGC’s financial position and consider their implications for future policy initiatives.

PBGC’s deficit generally

The FY2013 PBGC deficit of $36 billion cited by Congressman Ryan conflates the separate deficits for the PBGC single employer and multiemployer programs. The two programs are funded and managed separately. Under current law, assets in the single employer program can only be used to satisfy PBGC single employer program obligations.

Generally, the PBGC deficit includes:

[L]osses incurred from plans that have already terminated and estimated losses incurred from “probable” terminations. A plan is classified as a probable termination if PBGC determines that it is likely the plan will terminate. Generally, a plan is classified as a probable termination if the employer is in liquidation and there are no related companies that could fund the plan; the employer has filed for a distress termination; or PBGC is seeking involuntary plan termination.

The PBGC single employer program deficit for 2013 was $27.4 billion; the deficit for the multiemployer program was $8.3 billion; combine the two, round up, and you get Congressman Ryan’s $36 billion. (We note, however, that the premium increase only affected single employer plans.)

PBGC’s deficit in 2014

The deficit numbers for 2014 are, for both programs, pretty shocking. The single employer program deficit decreased $8 billion (almost 30%), to $19.3 billion.

The multiemployer program deficit increased by $34 billion (410%!), to $42.4 billion.

So, the financial condition of the single employer program (as PBGC measures it) improved significantly. The financial condition of the multiemployer program “dramatically worsened” (quoting Secretary of Labor Thomas E. Perez).

What drove the 2013-to-2014 changes?

According to PBGC the “primary drivers” of the $8 billion improvement in the single employer program were: (1) investment income of around $6.5 billion; (2) net premium income of around $4 billion; (3) a gain of around $1 billion resulting from increases in valuation interest rates; (4) a gain of around $0.5 billion from other actuarial adjustments; offset by (5) around $4 billion in charges primarily for expected interest on accrued liabilities. Thus, the big factors in the improvement were investment income – PBGC’s return on assets (overall) was 8% for the period – and premiums.

According to PBGC, “[t]he $34,176 million increase in the multiemployer program’s deficit is primarily due to losses from financial assistance stemming from the addition of two large new probables with a net claim of $26,335 million and 14 additional new probables with a net claim of $8,987 million ….”

Effect of changes in interest rates

Unlike prior years, in which changes (generally decreases) in interest rates drove much of the changes (generally increases) in the deficit, interest rates were not a big factor in this year’s numbers. PBGC uses two rates to discount liabilities – select and ultimate. In 2014, those rates changed little from 2013: the select rate increased 10 basis points (from 3.25% to 3.35%); the ultimate rate decreased 7 basis points (from 3.32% to 3.25%).

Many continue to criticize PBGC’s valuation interest rate methodology, which is based on a survey of annuity companies. Consider: the significant interest rate-driven decrease in single employer plan liabilities in 2014 (based on year end 2013 rates) does not show up in PBGC valuations for 2013 or 2014.,

Effect of premium increases in the single employer program

In 2014, PBGC had a net underwriting gain of $4 billion, a $1.4 billion increase over 2013 underwriting gain. That increase was, according to PBGC, “mainly due to the $869 million increase in single-employer net premium income, a decrease of $583 million in losses from completed and probable terminations, and a $134 million increase in credits for underwriting actuarial adjustments.”

Given this extraordinarily positive underwriting experience, it’s hard to understand why PBGC keeps asking for premium increases. Note that these numbers are for 2014 premiums. By 2016 premiums are scheduled to increase even more: the flat-rate premium is scheduled to increase from $49 (in 2014) to $64 in 2016; the variable-rate premium is scheduled to increase from $9 per $1,000 of unfunded vested benefits (in 2014) to an estimated $29 (in 2016). Unless PBGC’s “losses from completed and probable terminations” significantly increase (and the trend is in the opposite direction), PBGC is in the coming years likely to be awash in underwriting gains in the single employer program.

In his cover letter to the annual report Labor Secretary Perez reiterated the Administration’s call for changes in the PBGC single employer premium program that would give PBGC discretion to set premiums based on the financial condition of the sponsor. In the current context of legislative gridlock, adoption of that proposal is unlikely.

The multiemployer program

The loss in the multiemployer plan program is extraordinary – greater than any one-year loss in PBGC’s history. There are at this point no proposals that would fix a problem of this size. PBGC multiemployer plan program net premiums for 2014 were $122 million. Its deficit is now $42.4 billion. It’s almost inconceivable that this shortfall could be fixed by increased premiums. In this regard, PBGC states that: “the FY 2013 Projections Report showed the risk of multiemployer program insolvency rises rapidly, exceeding 50 percent in 2022 and reaching 90 percent by 2025.”

And so far no one has proposed a Plan B. There is a proposal to improve funding in the multiemployer plan system (as opposed to the PBGC multiemployer insurance program) by the Retirement Security Review Commission Of The National Coordinating Committee For Multiemployer Plans – “Solutions not Bailouts.” There have been some hearings in Congress. But no concrete proposal for what to do if the PBGC multiemployer plan insurance program goes broke.

Given the trend in the single employer program – increasing premiums and dramatic underwriting gains, decreasing losses and deficit – will there not be a temptation to simply merge the two programs and, in effect, have the single employer system bail out the multiemployer system?


Based on these numbers, the single employer PBGC insurance program looks in good shape. But, as we have discussed (see, for instance, our article PBGC variable premium vs. borrow-and-fund: impact of higher premiums), increased single employer program premiums increase the incentives for sponsors to reduce premium payments by funding, de-risking (particularly paying out terminated vested participants) and exiting the DB system. That trend may have a negative effect on PBGC’s premium base.

At the same time, the multiemployer PBGC insurance program is in a true and deep crisis, with no solution in sight.

Congress has been viewing retirement policy, and particularly DB policies with respect to DB funding/termination insurance, as a source for revenues to pay for policy initiatives it cares more about. That largely explains why PBGC premiums were increased in 2013 (to fix the budget) and DB contribution rules were eased in 2014 (to pay for the highway bill). Given the multiemployer plan crisis, however, Congress may actually have to do something about retirement policy, at least with regard to multiemployer plans.