This afternoon the acting director of the government-backed insurer of pension plans will testify that the Pension Benefit Guaranty Corporation has a $33.5 billion funding hole.
That’s the insurer’s largest deficit in its entire 35-year history, and will pose an enormous challenge to fill. The PBGC’s two income streams are investment gains and premiums from still-healthy plans, both of which are quite challenged at the moment. And while it has enough assets to cover its payments for years to come, the insurer is burning through $2.5 billion a year.
Vince Snowbarger’s testimony before the Senate Special Committee on Aging’s hearing entitled “No Guarantees: As Pension Plans Crumble, can PBGC Deliver?” will focus in large part on the figure, which has more than tripled since it was last reported six months ago. “The $33 billion is a startling increase,” acknowledges PBGC spokesman Jeffery Speicher. “It reflects the economy of the last few months, the number of new bankruptcies, etc. But it doesn’t mean we’re next in line for a bailout.”
Since the end of its last fiscal year, September, 2008, the PBGC has taken on a dozen plans from bankrupt companies that can no longer support them. With those plans came a cumulative shortfall of $418 million, the insurer will have to make up.
But there are many more plans waiting in the wings. Of the $33.5 billion under-funding, about $11 billion comes from obligations to newly terminated pension plans and plans that will probably be terminated in the near future. Another $7 billion of the shortfall comes from a decrease in the interest rate used to value the insurer’s long term liabilities.
The US auto industry alone has an underfunding of $77 billion, of which the PBGC would cover $42 billion should the plans be terminated. The insurer is also watching closely the troubled retail, financial services and health care industries.
One topic sure to come up at the hearings, is the controversial dealings of Snowbarger’s predecessor, Charles E.F. Millard with Wall Street firms being considered to run portions of the PBGC’s investment pool.
Millard had pushed the PBGC to sell its heavy bond holdings, and go further into alternative investments including private equity and real estate. Now he stands accused of improperly communicating with those firms during the selection process and using contacts there to search for a new job.
According to the PBGC, though, the insurer still has most of its investments — 68% — in bonds and only 2% in alternative investments, all of which it inherited from failed pension plans. That portfolio sustained $3 billion in losses in the past six months.
There is time to make up the $33.5 billion, which cover obligations to retirees and workers that stretch decades into the future. Last year the PBGC paid out $2.5 billion above the pension premiums participant companies put in. It has $56 billion in assets, so even at a higher payout rate, can cover its obligations for some years to come, a point Snowbarger stressed in a press release about his upcoming testimony. “Benefits are paid monthly over the lifetime of beneficiaries, not as lump sums,” he said. “Nevertheless, over the long term, the deficit must be addressed.”
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