Sponsor financial condition not an Early Warning Program trigger for PBGC

At the end of 2016, the (Obama Administration) Pension Benefit Guaranty Corporation amended the web page describing its Early Warning Program to include elements of a sponsor’s financial condition as “triggers,” initiating PBGC action. The change was controversial and was criticized by both industry representatives and PBGC’s Participant and Plan Sponsor Advocate. In May, 2017, the (Trump Administration) PBGC “updated” the web page to remove the sponsor financial condition Early Warning triggers.

In this article we briefly review the 2016 and 2017 changes to PBGC’s Early Warning Program. But first, to put the issue in context, we review Obama and Trump Administration PBGC policy more generally.


President Trump has still not appointed a new head of the Department of Labor’s Employee Benefit Security Administration or a new Treasury Benefits Tax Counsel. For perspective, President Obama had named Phyllis Borzi and Mark Iwry (respectively) to these posts by the end of April, 2009. Failure to make these new appointments may reflect the long time it has taken the Trump Administration to get its nominees approved by the Senate. It may also reflect a “lighter” approach to staffing the new Administration. Perhaps they do not subscribe to the view that “personnel is policy.”

And, for the moment at least, there has been no move to replace PBGC Director W. Thomas Reeder. We note, however, that the Director of the PBGC reports to the PBGC Board, which consists of the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Commerce. Those Trump Administration officials may have an effect on PBGC policy, even if the PBGC Director put in place by President Obama retains his job.

Obama Administration PBGC policy

The Obama Administration had a well-developed PBGC single employer program policy. In the early years it advocated for (and got) significant flat- and variable-rate premium increases to address that program’s deficit. More recently, it argued that increases in PBGC single employer premiums are no longer needed. It also urged Congress to give PBGC discretion to set premiums and to apply different premiums to sponsors depending on the sponsor’s financial condition. Congress never gave PBGC that authority.

Finally, the Obama PBGC undertook regulatory initiatives to include a sponsor’s financial condition as an element of enforcement policy. Thus, PBGC, under the Obama Administration, inserted the issue of sponsor financial condition into the definition of 4062(e) (substantial cessation of operations) triggering events, announcing, in 2012, guidelines under which it would not initiate 4062(e) enforcement if the affected company was “financially sound.” That initiative by PBGC was reversed by Congressional action (at the end of 2014). Similarly, in new reportable event regulations finalized in 2015, the Obama Administration PBGC shifted the focus of reportable event reporting waivers from the financial condition of the plan to the financial condition of the sponsor.

Finally, at the end of 2016, the Obama Administration PBGC modified its “Risk Mitigation and Early Warning Program” to include as triggering “Risk Identification” criteria “Significant credit deterioration” and “A downward trend in cash flow or other financial factors.”

Trump Administration PBGC policy

One of the principal retirement benefits items in the Trump Administration’s 2018 budget was a proposal “to improve the solvency of the [PBGC] by increasing the insurance premiums paid by underfunded multiemployer pension plans.” As we discussed in our recent article The multiemployer plan financial crisis – effect on single employer plans, PBGC’s multiemployer program is in a financial crisis that is probably un-solvable without some sort of bailout or radical benefit cutbacks. So we know that the Trump Administration is at least aware of and focused on the multiemployer plan crisis.

The other indication that the Trump Administration will change Obama PBGC policy is the modification (styled a “clarification” but in effect a reversal) of the December, 2016, change to the PBGC Early Warning Program.

PBGC’s Early Warning program

In her 2016 annual report, Constance Donovan, PBGC’s Participant and Plan Sponsor Advocate, summarized the PBGC Early Warning Program:

The Early Warning Program is not a statutory provision in Title IV of ERISA, but rather a “program” created by PBGC staff to monitor certain companies with underfunded defined benefit pension plans in order to identify corporate transactions that could jeopardize pensions and arrange suitable protections for those pensions and the pension insurance program. This program allows PBGC to prevent losses before they occur, rather than waiting to pick up the pieces when a company goes bankrupt and its financial resources are limited.

As the Advocate notes, “PBGC also interprets ERISA section 4042(a)(4) as providing authority for the Early Warning Program.” ERISA section 4042(a)(4) allows PBGC to go into court and institute proceedings to terminate a plan where “the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.”

The PBGC uses the Early Warning Program to interfere in corporate transactions that it believes may put plan funding or the PBGC at risk, threatening plan termination unless its concerns are addressed. Anyone who has been in a transaction brought to a halt by a call from the PBGC will know how consequential this action can be.

As the Advocate notes, formally (and significantly), the Early Warning Program is not a creature of the statute or of regulation. As a result, fundamental policy about when the PBGC can/will interfere in a company transaction can be changed simply by “updating” a web page.

December, 2016, web page update

That is what happened in December, 2016. The Obama PBGC updated the Early Warning Program web page to (as we noted) add “Significant credit deterioration” and “A downward trend in cash flow or other financial factors” to the “Transactions, events, or trends” that could trigger Early Warning Program action. As it explained, “[d]owngrading of a plan sponsor’s credit ratings could signal that the sponsor is, or is becoming, unable to support the plan.” And “[d]eclining cash flow could signal that the sponsor is becoming unable to support the plan.”

For context: the other Early Warning Program triggering events are corporate events that (in effect) fundamentally change the capital structure of the plan sponsor: a change in the controlled group; a major divestiture; a leveraged buyout; a substitute of secured debt for unsecured debt; or payment of a large shareholder dividend.

Reaction from the sponsor community was swift. As PBGC’s Participant and Plan Sponsor Advocate noted in her 2016 Annual Report:

Early reaction by the sponsor community to the new guidance is that it seems to suggest that PBGC can and will intervene in routine business transactions which is hardly helpful in encouraging the maintenance of pension plans and calls into question whether Congress ever intended PBGC have this kind of authority. This guidance also significantly expands on the types of situations that might trigger an Early Warning Program case.

In this regard, the Advocate characterized “PBGC’s use of the Early Warning Program as an end run around 4062(e) restrictions enacted by Congress in 2014.”

May, 2017, web page update

In May, 2017, PBGC again modified its explanation of the Early Warning program, deleting the two sponsor financial condition items from the Risk Identification section, but adding a “Credit Quality” item to the program’s Information Request section. In related FAQs published at the same time, it stated:

A change in a plan sponsor’s credit quality does not trigger an Early Warning Program review. But if announcement of a transaction does trigger a review, PBGC generally includes credit quality as part of the analysis along with other information. We have made modifications to the Risk Mitigation & Early Warning webpage to make that clear.

* * *

The Obama Administration’s initiative to include sponsor financial condition as an element of PBGC premium, 4062(e), reportable event and Early Warning Program policy was controversial. Even though the Obama-appointed Director remains in place at PBGC, it appears that the Trump Administration is prepared to (to some extent at least) undo this policy at PBGC.

We will continue to follow this issue.