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The Pension Benefit Guaranty Corporation 2005 Fiscal Year Report: An Agency Facing Continuing Financial Challenges

The Pension Benefit Guaranty Corporation (PBGC) protects the pensions of 44 million workers and retirees in 30,300 private sector single- employer and multiemployer defined benefit pension plans. A defined benefit pension plan provides a specified monthly benefit at retirement, usually based on salary or a stated dollar amount and years of service. The PBGC provides benefits to a worker if the defined benefit plan is ended with insufficient funding to pay its promised benefits and the employer is in financial distress. The number of plans it insures has continued to decline, falling by approximately 900 over the past fiscal year. This change both reduces the liabilities it insures and reduces its revenue from premium payments.

The PBGC provides a maximum guaranteed annual benefit of $47,659 for a single life pension (payable as an annuity over the life of the participant) received at age 65 for plans terminating in 2006. The maximum guaranteed annual benefit is reduced for benefits received at earlier ages. In 2005, the PBGC paid annual benefits of $3.7 billion.

PBGC’s operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, as well as investment income, assets from underfunded pension plans it has taken over, and recoveries from companies formerly responsible for the plans. The PBGC maintains separate insurance programs for single-employer defined benefit plans and for multiemployer defined benefit plans. Single-employer plans are sponsored by a single employer for its employees, while multiemployer plans are collectively bargained plans to which more than one unrelated employer in an industry contributes.

Continuing Deficits

The fiscal year 2005 Performance and Accountability Report for PBGC indicates that the agency’s deficit for its insurance program for single employer plans was reduced by $529 million compared to the end of the 2004 fiscal year. At the end of fiscal year 2005 (September 30, 2005), the PBGC’s single-employer insurance program had a deficit of $22.8 billion. This figure equals the difference between its total assets of $56.5 billion and total liabilities of $79.2 billion at the end of the fiscal year.

Had there been no change in interest rates compared to the previous year, the deficit would have increased by $1.8 billion. However, rising interest rates reduced its liabilities by $2.3 billion because higher discount rates result in lower liabilities.

Causes of the Deficit

Claims made by companies on PBGC’s pension benefit insurance are sensitive to changes in interest rates and stock returns, overall economic conditions, underfunding in some large plans, the economic performance of particular industries, such as the airlines industry, and the bankruptcy of a few large companies. The gain for fiscal year 2005 of $529 million compares to a net loss of $12.1 billion in 2004. The loss for that year included a one-time charge of $1.3 billion due to increased life expectancy of participants. The large losses in 2004 were an increase from losses of $7.6 billion in 2003 and $11.4 billion for 2002.

These large losses caused the net asset position of the PBGC to decline from its surplus of $7.7 billion at the end of fiscal year 2001 to its deficit of $22.8 billion at the end of fiscal year 2005 (Table 1).

Table 1. PBGC Single-Employer Trust Fund Surplus or Deficit, Fiscal Year 2000-2005

Fiscal Year Surplus (Deficit)
2000 $9.7 billion
2001 $7.7 billion
2002 ($3.6 billion)
2003 ($11.2 billion)
2004 ($23.3 billion)
2005 ($22.8 billion)

Source: Annual Reports of the PBGC,
available at

A Problem, Not a Crisis

Although it has a large unfunded liability, the PBGC has sufficient assets to meet its cash flow obligations for a number of years, and it thus is not facing a liquidity crisis. Its assets at the end of fiscal year 2005 of $56.5 billion were far greater than the $3.7 billion it paid in benefits that year. Nonetheless, its unfunded liability indicates that it does not have sufficient assets to pay all future benefits that it has promised. While it is not facing a liquidity crisis, it is facing a serious long-term financing problem.

Events Since FY 2005

Since the end of the 2005 fiscal year, the financial situation of the PBGC has further deteriorated. Taking into account further plan terminations since September 30, 2005, the deficit would have risen to $25.7 billion (PBGC Press Release, November 15, 2005). That change represents an unusually large increase in liabilities for a short time period.

Concern has been raised that competitive pressures in the airlines industry may cause other airlines to declare bankruptcy and to transfer their pension plans to the PBGC. The United Airlines plan terminations highlight the weaknesses of U.S. funding regulations that permit large amounts of underfunding to occur. The average funding level for plan terminations taking place during fiscal year 2005 was 50 percent (PBGC Press Release, November 15, 2005).

The Need for Reforms

The PBGC argues that a comprehensive reform of the defined benefit plan funding rules must be enacted to strengthen the financial health of the defined benefit pension system. Reforms need to increase the funding of underfunded plans. The PBGC’s recent experience of plan terminations indicates that its unfunded liability has occurred in part because, even when plan sponsors make required contributions, serious pension underfunding can occur.

Written by John Turner, AARP Public Policy Institute

March 2006
©2006 AARP
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