Pension Benefit Guaranty Corporation Insurance Programs
With over $112 billion in assets, PBGC’s portfolio is one of the largest of any federal government corporation. Through its single-employer and multiemployer insurance programs, PBGC insures the pension benefits of nearly 37 million American workers and retirees who participate in about 24,800 private-sector defined benefit plans. PBGC’s financial future remains uncertain, due in part to a long-term decline in the number of traditional defined benefit plans and the collective financial risk of the many underfunded pension plans PBGC insures. We designated the single-employer program as high risk in 2003 and the multiemployer program in 2009.
Since fiscal year 2013, PBGC’s financial deficit has increased by nearly 45 percent. At the end of fiscal year 2018, PBGC’s net accumulated financial deficit was over $51 billion—an increase of about $16 billion since 2013. The single-employer program, composed of about 23,400 plans, accounted for a surplus of $2.4 billion—an improvement of about $30 billion since 2013. The multiemployer program, composed of about 1,400 plans, accounted for a deficit of about $54 billion. In addition, PBGC estimated that its exposure to potential future losses for underfunded plans in both the single- and multiemployer programs was nearly $185 billion. According to past PBGC projections, it is nearly certain that the multiemployer program does not have the needed resources to satisfy the agency's long-term obligations.
As with our last High-Risk Report in 2017, we are not rating this high-risk area because addressing the identified issues primarily involves congressional action.
While PBGC faces a long-term challenge with its single-employer program, it faces an immediate and critical challenge with its multiemployer program. In a March 2013 report on PBGC’s multiemployer program, we recommended that Congress consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system.
In 2014, Congress took action to address this growing crisis by passing the Multiemployer Pension Reform Act (MPRA) that enacted several reforms responsive to our report. Specifically, MPRA provided severely underfunded plans, under certain conditions and only with the approval of federal regulators, the option to reduce the retirement benefits of current retirees to avoid plan insolvency. The act also expanded PBGC’s ability to intervene when plans are in financial distress. In addition, MPRA more than doubled the flat-rate, or per participant, premiums paid by multiemployer plans (from $12 per participant in plan year 2014 to $26 per participant in plan year 2015) and provided for future increases indexed to inflation. For plan year 2019, the per participant, flat-rate premium is $29.
Even though these reforms were intended to improve the program’s financial condition, PBGC's projections suggest that the insolvency of the multiemployer program remains highly likely within the next 6 years. Since 2013, the agency’s net financial deficit for the multiemployer program has grown nearly sixfold (see figure 14). Prior to passage of MPRA, PBGC estimated that the multiemployer insurance fund would likely be exhausted by 2022 as a result of current and projected plan insolvencies. In February 2017, we reported that PBGC officials said that the act did not fully address the crisis in the multiemployer program. Officials predicted the act's changes would only forestall insolvency by about an additional 3 years. As of year-end 2018, 25 multiemployer plans submitted, under MPRA, 34 applications to suspend previously accrued and protected benefits. Of the applications submitted for Treasury review, 10 have been approved, 5 have been denied, 12 have been withdrawn, and 7 are pending review or awaiting determination.
Pension Benefit Guaranty Corporation’s (PBGC) Net Financial Position of the Single-Employer and Multiemployer Programs Combined, Fiscal Years 1990 through 2018
While changes were made with passage of MPRA, PBGC's projections of the multiemployer program's pending insolvency have become more concerning since 2017. Based on fiscal year 2017 projections, PBGC officials believe there is an over 40 percent chance that the multiemployer program will be insolvent by the year 2024. After that, the risk of insolvency rises rapidly—reaching over 90 percent by 2025 and 99 percent by 2026. If the multiemployer program becomes insolvent, participants in insolvent pension plans that receive financial assistance from PBGC will receive a small fraction of current statutory guarantees. Though guaranteed benefits depend on the years of service a participant earned through qualifying work, the maximum guarantee is currently $12,870 per year for a retiring participant that had 30 years of service. PBGC estimates that under its projection, most participants would receive less than $2,000 per year and in many cases, much less.
The Bipartisan Budget Act of 2018 established a Joint Select Committee on Solvency of Multiemployer Pension Plans. The goal of the joint committee is to improve the solvency of multiemployer pension plans and PBGC. The joint committee held five hearings on the multiemployer system and PBGC as well as how stakeholders—particularly current workers, retirees, and employers—are likely to be affected by potential insolvencies. The act tasked the joint committee, which by law was set to terminate by December 31, 2018, with voting on a report that includes any findings, conclusions and recommendations—as well as proposed legislative language to carry out any recommendations—by November 30, 2018. However, the co-chairmen of the joint committee released a statement committing to working to solve the multiemployer pension crisis past the November 30th deadline. On January 9, 2019 the chairman of the House Ways and Means Committee introduced legislation with bi-partisan co-sponsorship that would establish a new agency within Treasury that would be tasked with providing and overseeing loans to certain troubled multiemployer plans.
Although the net deficit for the single-employer program has improved significantly since we last reported, PBGC continues to face long-standing, structural funding challenges due to an overall decline in the defined benefit pension system. While tens of thousands of companies continue to offer traditional defined benefit plans, the number of single- and multiemployer plans and participants have declined significantly. Since 1985, there has been a 78 percent decline in the number of plans insured by PBGC—from about 114,400 plans to about 24,800 plans in 2018. In addition, nearly 13 million fewer workers are actively participating in these plans.
While the PBGC's single-employer program currently is in surplus, it is not certain that the program will remain in surplus into the future. Further, PBGC's net financial position is highly sensitive to prevailing economic conditions. PBGC's past experience with large claims shows that the single-employer program’s condition can change quickly and precipitously. For example, the spate of plan terminations in the airline and steel industries from 2001 through 2006 resulted in more than $20 billion of net claims. The possibility for large, future claims persists as underfunded plans sponsored by companies with credit ratings below investment grade represent $175 billion in potential exposure as of fiscal year-end 2018.
The structure of PBGC’s premium rates—a key component of its funding—has long been another area of concern. Despite periodic increases in premium rates, which are set according to statute, the premiums do not align with the multiplicity of risks PBGC insures against. Currently, plan underfunding is the only risk factor currently considered in determining a sponsor’s premium rate. Under the current premium structure for its single-employer program, PBGC collects from sponsors a per-participant flat-rate premium and a variable-rate premium that is based on a plan’s level of underfunding. To date, no legislation incorporating additional risk factors, such as company financial health or plan investment mix, into PBGC’s premium structure has been enacted.
PBGC’s governance structure is another area of weakness noted in several of our past reports. In particular, we have long recommended that PBGC’s board—currently composed of the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Commerce—be expanded to include additional members who possess diverse knowledge and expertise useful to PBGC’s mission. In addition, the National Academy of Public Administration recommended in a 2013 report to Congress that PBGC's board be expanded if PBGC is provided greater responsibility over its policies. We have long emphasized that PBGC requires strong and stable leadership to ensure it can meet its future financial challenges.
Although Congress and PBGC have taken significant and positive steps to strengthen the agency over the past 5 years since the passage of MPRA, concerns are becoming increasingly urgent with particular respect to the multiemployer program and PBGC’s overall funding structure and governance. Also, the premium structure for PBGC’s single-employer program continues to result in rates that do not align with the risk the agency insures against. Absent additional steps to improve PBGC’s finances, the long-term financial stability of the agency remains uncertain and the retirement benefits of millions of American workers and retirees could be at risk of dramatic reductions.
Congressional Actions Needed
As we have previously recommended over the years since we added PBGC to the High-Risk List, Congress should consider improving the long-term financial stability of both of PBGC’s insurance programs by:
- authorizing a redesign of PBGC’s single-employer program premium structure to better align premium rates with sponsor risk;
- adopting additional changes to PBGC’s governance structure—in particular, expanding the composition of its board of directors;
- strengthening funding requirements for plan sponsors, as appropriate given national economic conditions;
- working with PBGC to develop a strategy for funding PBGC claims over the long term as the defined benefit pension system continues to decline; and
- enacting additional structural reforms to reinforce and stabilize the multiemployer system, and balance the needs and potential sacrifices of contributing employers, participants, and the federal government.
GAO-18-106: Published: Jun 4, 2018. Publicly Released: Jun 4, 2018.
The Central States, Southeast and Southwest Areas Pension Fund (CSPF) was established in 1955 to provide pension benefits to trucking industry workers, and is one of the largest multiemployer plans. According to its regulatory filings, CSPF had less than half the estimated funds needed to cover plan liabilities in 1982 at the time it entered into a court-enforceable consent decree that provides fo...
GAO-14-264: Published: Sep 30, 2014. Publicly Released: Oct 30, 2014.
Public and private sector defined benefit pension plans are subject to different rules and guidance regarding discount rates—interest rates used to determine the current value of estimated future benefit payments. These differences can result in significant implications:Sponsors of public sector plans generally use discount rates using a long-term assumed average rate of return on plan assets. T...
GAO-13-240: Published: Mar 28, 2013. Publicly Released: Apr 8, 2013.
The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans--those designated as being in critical status--either ha...
GAO-13-428T: Published: Mar 5, 2013. Publicly Released: Mar 5, 2013.
The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the majority of the most severely underfunded plans--those designated as being in critical status--developed plans...
GAO-13-58: Published: Nov 7, 2012. Publicly Released: Nov 8, 2012.
Various options are available to make the Pension Benefit Guaranty Corporation's (PBGC) premium structure more risk-based and better reflect the risk of future claims. Historically, PBGC's premiums have not fully reflected the risks PBGC insures against--chiefly that a plan sponsor with an underfunded plan will become bankrupt, forcing the termination of the plan and imposing a claim on PBGC. PBGC...
GAO-11-271: Published: Jun 30, 2011. Publicly Released: Aug 1, 2011.
The Pension Benefit Guaranty Corporation's (PBGC) insures the pension benefits of more than 44 million people. Since its inception in 1974, PBGC's assets have grown from about $34 million to almost $80 billion in 2010, largely through assets received in plan terminations. Despite significant swings in PBGC's investment history, there has been little focus on the extent to which it has met its inve...
GAO-11-182T: Published: Dec 1, 2010. Publicly Released: Dec 1, 2010.
The Pension Benefit Guaranty Corporation (PBGC) is a self-financing government corporation that insures the pensions of 44 million workers in more than 27,000 private sector defined benefit pension plans. Yet, PBGC faces financial instability that could pose a future threat to this source of protection for Americans' retirement income. As fewer sponsors pay premiums for fewer participants in defin...
GAO-11-79: Published: Oct 18, 2010. Publicly Released: Nov 16, 2010.
Thirty years ago Congress enacted protections to ensure that participants in multiemployer pension plans received their promised benefits. These defined benefit plans are created by collective bargaining agreements covering more than one employer. Today, these plans provide pension coverage to over 10.4 million participants in approximately 1,500 multiemployer plans insured by the Pension Benefit...