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Pension Benefit Guaranty Corporation (PBGC): A Primer

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Pension Benefit Guaranty Corporation (PBGC) and Defined Benefit Pension Plan Funding Issues: A Primer John J. Topoleski Analyst in Income Security June 25, 2012 September 3, 2014 The House Ways and Means Committee is making available this version of this Congressional Research Service (CRS) report, with the cover date shown, for inclusion in its 20122014 Green Book website. CRS works exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of both the House and Senate, regardless of party affiliation. Congressional Research Service 95-118 CRS Report for Congress Prepared for Members and Committees of Congress PBGC and Defined Benefit Pension Plan Funding Issues Pension Benefit Guaranty Corporation (PBGC): A Primer Summary The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established in 1974 by the Employee Retirement Income Security Act (ERISA; P.L. 93-406). It was created to protect the pensions of participants and beneficiaries covered by private sector, defined benefit (DB) plans. These pension plans provide a specified monthly benefit at retirement, usually either a percentage of salary or a flat dollar amount multiplied by years of service. Defined contribution plans, such as §401(k) plans, are not insured. The PBGC is chaired by the Secretary of Labor, with the Secretaries of the Treasury and Commerce serving as board members. The PBGC runs two distinct insurance programs for single-employer and multiemployer plans. Multiemployer plans are collectively bargained plans to which more than one company makes contributions. PBGC maintains separate reserve funds for each program. In FY2011, the PBGC insured about 27,066 DB pension plans covering 44.2 million people. The PBGC paid or owed benefits to 1.5 million people and took in 152 newly terminated pension plans. A firm must be in financial distress to end an underfunded plan. Most workers in single-employer plans taken over by PBGC receive the full benefit earned at the time of termination, but the ceiling on multiemployer plan benefits that could be guaranteed has left almost all of these retirees without full benefit protection. In general, defined benefit pension plans are required to have sufficient funds from which to pay current and expected future benefits. Each year, plan sponsors are required to contribute the value of benefits earned by participants in that year and a portion of any prior years’ underfunding, which is the amount by which the value of current and future benefits exceeds current plan assets. Changes by Congress to pension funding requirements and the economic recession that began in December 2007 and ended in June 2009 have caused required contributions to pension plans to increase in recent years. To improve pension plan funding, Congress passed the Pension Protection Act of 2006 (PPA, P.L. 109-280), which resulted in increases in the amount of required contributions to pension plans by plan sponsors. Two other factors have caused increases in required contributions: (1) investment losses experienced by pension plans in the 2008 stock market downturn, which lowered the value of plan assets, and (2) lower interest rates as a result of Federal Reserve actions to try to influence economic activity, which increased the value of future pension plan benefit obligations. In addition, the recession negatively affected company profits, which made required contributions to pensions more difficult to make. In the 111th Congress, H.R. 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (P.L. 111-192), provided defined benefit pension plans sponsors the opportunity to spread over a greater number of years than specified under then current law contributions to offset the losses which resulted from the stockmarket downturn in 2008. In the 112th Congress, the Senate approved an amendment offered by Senate Majority Leader Harry Reid to S. 1813, Moving Ahead for Progress in the 21st Century (MAP-21), which contains provisions that would address the use of excess defined benefit pension plan assets and the interest rates that defined benefit plans use to value plan liabilities. Senate Majority Leader Harry Reid has proposed (1) using the pension-related provisions in S. 1813, as passed by the Senate on March 14, 2012, and (2) increasing the premiums that pension plan sponsors pay to PBGC as an offset for a one-year extension of current student loan interest rates. Congressional Research Service PBGC and Defined Benefit Pension Plan Funding Issues Contents Pension Benefit Guaranty Corporation............................................................................................ 1 PBGC Financing........................................................................................................................ 1 Premiums................................................................................................................................... 1 Pension Benefit Guaranty.......................................................................................................... 1 Current Financial Picture........................................................................................................... 2 Defined Benefit Pension Funding.................................................................................................... 3 Funding Relief Enacted in the 111th Congress........................................................................... 3 Single-Employer Funding Relief ........................................................................................ 4 Certain Other Plans ............................................................................................................. 4 Plans Run by Charities ........................................................................................................ 5 Multiemployer plans ........................................................................................................... 5 Funding Proposals in the 112th Congress................................................................................... 5 Proposals in S. 1813, Moving Ahead for Progress in the 21st Century (MAP-21), as Passed by the Senate on March 14, 2012..................................................................... 6 Proposal to Use Segment Rate Stabilization and PBGC Premium Increases to Offset Freeze in Student Loan Interest Rates................................................................. 11 Figures Figure 1. Hypothetical Application of Segment Rate Stabilization Provision as Found in S. 1813, as Passed by the Senate on March 14, 2012 ................................................................... 9 Figure 2. Moody’s Seasoned Aaa Corporate Bond Yields............................................................. 11 Tables Table 1. PBGC Single and Multi-Employer Insurance Programs: Net Financial Position, FY2002 -FY2011.......................................................................................................................... 2 Table 2. Applicable Minimum and Maximum Interest Rate Percentages of 25 Year Averages for Pension Funding in S. 1813, as Passed by the Senate on March 14, 2012............ 10 Congressional Research Service PBGC and Defined Benefit Pension Plan Funding Issues Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established in 1974 by the Employee Retirement Income Security Act (ERISA; P.L. 93-406). It was created to financial distress to end an underfunded single-employer plan. Multiemployer plans do not terminate. When a multiemployer plan becomes insolvent and is not able to pay promised benefits, PBGC provides financial assistance to the plan in the form of loans, although PBGC does not expect the loans to be repaid. In FY2013, PBGC insured about 24,835 DB pension plans covering 42.3 million people. PBGC paid or owed benefits to 1.5 million people, became the trustee of 111 newly terminated singleemployer pension plans, and provided financial assistance to 44 multiemployer pension plans. There is a statutory maximum benefit, which PBGC can pay. Participants in single-employer plans that terminate in 2014 and are trusteed by PBGC may receive up to $59,318 per year. Participants in multiemployer plans that receive financial assistance from PBGC may receive up to $12,870 per year. Most workers in single-employer plans taken over by PBGC receive the full pension benefit that they earned at the time of termination. At the end of FY2013, PBGC had a total deficit of $35.7 billion, of which $27.4 billion was from the single-employer program and $8.3 billion was from the multiemployer program. PBGC’s single-employer program has been on the Government Accountability Office’s (GAO’s) list of high-risk government programs since 2003. PBGC’s multiemployer program was added in 2009. PBGC’s projections expect the financial position of the single-employer program to improve slightly whereas the financial position of the multiemployer program is expected to worsen considerably over the next 10 years. Congressional Research Service Pension Benefit Guaranty Corporation (PBGC): A Primer Contents Pension Benefit Guaranty Corporation ........................................................................................... 1 PBGC Administration ............................................................................................................... 1 PBGC Financing ....................................................................................................................... 1 Premiums .................................................................................................................................. 2 Requirements for PBGC Coverage ........................................................................................... 3 Pension Benefit Guaranty ......................................................................................................... 4 Single-Employer Insurance Program .................................................................................. 4 Multiemployer Pension Insurance Program........................................................................ 9 Current Financial Status .......................................................................................................... 10 Finances of the Single-Employer Insurance Program........................................................ 11 Finances of the Multiemployer Insurance Program .......................................................... 13 PBGC and the Federal Budget ................................................................................................ 15 PBGC Trust Fund.............................................................................................................. 15 PBGC Revolving Funds .................................................................................................... 16 Future Financial Condition ............................................................................................... 16 Figures Figure 1. Financial Position of the Single-Employer Insurance Program of the Pension Benefit Guaranty Corporation .................................................................................................... 13 Figure 2. Financial Position of the Multiemployer Insurance Program of the Pension Benefit Guaranty Corporation .................................................................................................... 15 Tables Table 1. Number of Standard and Trusteed Pension Plan Terminations.......................................... 7 Table 2. PBGC Single and Multi-Employer Insurance Programs: Net Financial Position, FY2002 - FY2013 ....................................................................................................................... 11 Table 3. Pension Benefit Guaranty Corporation (PBGC) Benefit Payments and Payees, 1997 - 2012................................................................................................................................. 12 Table 4. PBGC Multiemployer Insurance Program: Financial Assistance to Pension Plans......... 14 Congressional Research Service Pension Benefit Guaranty Corporation (PBGC): A Primer Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406). It was created to protect the pensions of participants and beneficiaries covered by private sector, defined benefit (DB) plans. These pension plans provide a specified monthly benefit at retirement, usually either a percentage of salary or a flat dollar amount multiplied by years of service. Defined contribution plans, such as §401(k) plans, are not insured. The PBGC is chaired by the Secretary of Labor, with the Secretaries of the Treasury and Commerce serving as board members. The PBGC runs two distinct insurance programs: single-employer and multiemployer plans. Multiemployer plans are collectively bargained plans to which more than one company makes contributions. The PBGC maintains separate reserve funds for each program. In FY2011, the PBGC FY2013, PBGC insured about 27,06624,835 DB pension plans covering 44.242.3 million people. It paid or owed benefits to 1.5 million people and took in 152111 newly terminated pension plans. A firm must be in financial financial distress to end an underfunded plan. Most workers in single-employer plans taken over by the PBGC by PBGC receive the full benefit earned at the time of termination, but the ceiling on multiemployer plan benefits that could be guaranteed has left almost all of these retirees without full benefit protection. PBGC Financing The PBGC is required by ERISA to be self-supporting and receives no appropriations from general revenue. The most reliable source of PBGC revenue is the premiums set by Congress and paid by the private-sector employers that sponsor DB pension plans. Other sources of income are assets from terminated plans taken over by the PBGC, investment income, and recoveries collected from companies when they end underfunded pension plans. The PBGC is authorized to borrow up to $100 million from the U.S. Treasury. P.L. 96-364 requires that the PBGC’s receipts and disbursements be included in federal budget totals. Premiums The minimum annual premium charged for each participant in a single-employer DB plan was raised for the 2006 plan year from $19 to $30 by the Deficit Reduction Act (DRA) of 2005 (P.L. 109-171). This law also raised the multiemployer plan premium from a flat $2.60 annually per participant to $8. Because these premiums are now adjusted for inflation, the 2012 rates will be $35 and $9, respectively. The DRA added a new $1,250 per participant premium for certain plans terminated after 2005. This premium is payable for the year of termination and each of the next two years. An additional premium of $9 for each $1,000 of “unfunded vested benefits,” as newly defined by the Pension Protection Act of 2006 (PPA; P.L. 109-280), is assessed against plans that are not fully funded. Effective in 2008, the PPA also eliminated certain exemptions from this variable premium. Pension Benefit Guaranty ERISA sets a maximum on the individual benefit amount that the PBGC can guarantee. The ceiling for single-employer plans is adjusted annually for national wage growth. The maximum Congressional Research Service 1 PBGC and Defined Benefit Pension Plan Funding Issues pension guarantee is $55,840 a year for workers aged 65 in plans that terminate in 2012. This amount is adjusted annually and is decreased if a participant retires before age 65 or if the pension plan provides benefits in some form other than equal monthly payments for the life of the retiree. Only “basic benefits” are guaranteed. These include benefits beginning at normal retirement age (usually 65), certain early retirement and disability benefits, and benefits for survivors of deceased plan participants. Only vested benefits are insured. The median monthly benefit received in FY2009 was $305. In 2006, PBGC indicated that 84% of PBGC recipients received their full benefits. In contrast, the ceiling on guaranteed benefits for multiemployer plans is not adjusted annually. The amount set in 1980 did not change until the Consolidated Appropriations Act, 2001 (P.L. 106-554) became law in December 2000. These plans determine benefits by multiplying a flat dollar rate by years of service, so the benefit guaranty ceiling is tied to this formula. The new ceiling equals 100% of the first $11 of monthly benefits per year of service plus 75% of the next $33 of monthly benefits per year of service. Current Financial Picture Table 1 provides information on the net financial position from FY2002 through FY2011. In 1996, the PBGC showed a surplus in its single-employer program for the first time in its history. That surplus peaked at $9.7 billion in 2000, helped by the strong performance of the equity markets in the 1990s. Table 1. PBGC Single and Multi-Employer Insurance Programs: Net Financial Position, FY2002 -FY2011 (billions of dollars) Fiscal Year Single Employer Program Multi-Employer Program 0.2 Total PBGC Deficit 2002 -3.6 -3.5 2003 -11.2 -0.3 -11.5 2004 -23.3 -0.2 -23.5 2005 -22.8 -0.3 -23.1 2006 -18.1 -0.7 -18.9 2007 -13.1 -1.0 -14.1 2008 -10.7 -0.5 -11.2 2009 -21.1 -0.9 -21.9 2010 -21.6 -1.4 -23.0 2011 -23.3 -2.8 -26.0 Source: PBGC. The weakness in the economy in 2001, particularly in the steel and airline industries, led to large and expensive plan terminations that eliminated the surplus. By the end of 2004, the singleemployer program had a deficit of $23.3 billion. The deficit was $13.1 billion at the end of 2007 and $10.7 billion at the end of FY2008. The deficit increased to $21.1 billion at the end of FY2009, $21.6 billion at the end of FY2010, and $23.3 billion at the end of FY2011. The Congressional Research Service 2 PBGC and Defined Benefit Pension Plan Funding Issues multiemployer program had a surplus from 1982 to 2002, but the PBGC reported that it had a deficit of $473 million at the end of FY2008, $869 million at the end of FY2009, $1.4 billion at the end of FY2010, and $2.8 billion at the end of FY2011. Defined Benefit Pension Funding To ensure that sufficient money is available to pay promised pension benefits to participants and beneficiaries, ERISA sets rules that require plan sponsors to fully fund the pension liabilities of defined benefit plans. The funding requirements of ERISA recognize that pension liabilities are long-term liabilities. Consequently, plan liabilities need not be funded immediately, but instead can be amortized (paid off with interest) over a period of years. The assets of the pension plan must be kept in a trust that is separate from the employer’s general assets. Assets in the pension trust fund are protected from the claims of creditors in the event that the plan sponsor files for bankruptcy. ERISA requires employers that sponsor defined benefit plans to fund the pension benefits that plan participants earn each year. This is referred to as funding the target normal cost of the plan. In addition, the funding obligation for plan sponsors may be affected by the following: • Pension benefits granted to employees for past service, but for which no monies were set aside. • Increases in the level of benefits by plan amendment. • Changes in the present value of future benefit obligations as a result of interest rate changes. Because DB pension benefits are generally paid as a stream of payments over several years in the future, the plan calculates a current value of the benefits by discounting the future cash flows using a specified interest rate. Changes in the interest rate cause the value of future benefit obligations—and the amount that plans must set aside to meet them—to change. • Changes in the value of investments. Since many pension plans invest at least a portion of their assets in equities and other financial assets like bonds, changes in the stock market and other financial markets cause changes in the value of pension plans’ assets. Decreases in value of investments must be made up by increases in plan sponsor contributions while increases in the value of investments may be used to offset future funding obligations. Pension plan underfunding has increased in recent years. An analysis by Milliman found that the average funding by the 100 largest corporate DB plans has been less than 100% since July 2008 and was 72.4% as of December 31, 2011.1 Funding Relief Enacted in the 111th Congress The funding obligations for pension plans increased sharply in 2008 as a result of the economic recession that began in December 2007. Three factors have contributed to the increase in DB 1 Details of the analysis are available at http://www.milliman.com/expertise/employee-benefits/products-tools/pensionfunding-index/. Congressional Research Service 3 PBGC and Defined Benefit Pension Plan Funding Issues pension plans sponsors’ funding obligations: (1) the PPA changed some of the methods that plan sponsors use to value plan assets and liabilities; (2) the decline in the stockmarket in 2008 caused the value of pension plan assets to decrease because many pension plans hold part of their portfolios in equities; and (3) the decline in interest rates caused the value of pension plan benefit obligations to increase. In addition, the economic downturn may have hurt the ability of some pension plans to pay for their funding obligations. Some have suggested that monies that plan sponsors would use to fund their benefit obligations would be better spent on other, more immediate company priorities. Congress provided funding relief to DB pension plan sponsors in 2010 in H.R. 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (P.L. 111-192), which was introduced by Representative John Dingell on October 29, 2009. The bill passed the House on November 7, 2009, and did not contain any pension funding relief provisions. On June 18, 2010, an amended bill passed the Senate. The Senate approved bill contains funding relief provisions. The House passed the Senate’s amendment to H.R. 3962 on June 24, 2010. The President signed the bill into law on June 25, 2010.2 Single-Employer Funding Relief Changes to a pension plan’s funding level that result in increased required funding by a plan sponsor may be amortized over a period of seven years. P.L. 111-192 allowed pension plan sponsors to amortize their funding shortfalls either over 9 years, with the first 2 years of payments consisting of interest only on the amortization charge and the next 7 years consisting of interest and principal, or over 15 years. P.L. 111-192 contained provisions that required plan sponsors that chose one of these amortization schedules to make additional contributions to the plan if the plan sponsors pays excess compensation or declares extraordinary dividends. Specifically, the provisions required additional contributions to the plan from plan sponsors that • provided more than $1 million in compensation to any employee;3 and • (1) paid dividends or redeem company stock greater than the value of a company’s net income for the prior year or (2) paid dividends greater than the sum of a company’s dividends in the previous five years. Certain Other Plans A provision allowed funding relief to plans that would otherwise be ineligible. Certain rural cooperatives and defense contractors were allowed to delay the implementation of the funding 2 Section 202 of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA; P.L. 110-458) allowed some firms to delay the implementation of increased funding requirements that were required by the PPA. For more information on this provision, see CRS Report R40171, The Worker, Retiree, and Employer Recovery Act of 2008: An Overview, by Jennifer Staman. 3 The following are exempted from the calculation of compensation: (1) amounts set aside for paying deferred compensation as part of a nonqualified deferred compensation arrangement; (2) compensation for services performed before March 1, 2010; and (3) payments for certain types of compensation as a result of a contract that was in effect prior to March 1, 2010. Congressional Research Service 4 PBGC and Defined Benefit Pension Plan Funding Issues requirements of the PPA. PBGC settlement plans were not subject to any of the provisions of the PPA. These plans would otherwise be ineligible for the funding relief provisions currently under consideration. P.L. 111-192 allows these plans to choose either the 9-year amortization period (with the first 2 years of payments consisting of interest only on the amortization charge) or the 15-year amortization period. Plans Run by Charities A credit balance is an amount of a plan sponsor’s contributions to a pension plan that exceed the minimum funding requirement. Under current law, plans that are funded in excess of 80% may apply previous years’ credit balances to offset the current year’s required funding. P.L. 111-192 allowed charities as described in 26 U.S.C. 501(c)(3) to use prior years’ credit balances if the plan was least 80% funded in the plan year that ended prior to September 1, 2008. Multiemployer plans Multiemployer plans may currently amortize their investment losses over a 15-year period. Under the DB funding provisions passed in P.L. 111-192, multiemployer plans can • elect to amortize their net investment losses over 30 years if the plan sponsor can certify the plan’s solvency over the amortization period; and • use asset valuation methods that result in asset values that range from 80% to 130% of market value. They could use these valuation methods for up to 10 years. Multiemployer plans that elect to use either of these funding relief methods are not be allowed to increase plan benefits for two years unless the benefit increases are funded by additional contributions to the plan. Funding Proposals in the 112th Congress The funding obligations for pension plans continue to be a concern for some policymakers. Some policy analysts have raised the following points in discussions of changes to pension plan funding rules: • Low interest rates in recent years have resulted in increases in the valuation of pension plan liabilities. Some have suggested that these increases may be much higher than is necessary to ensure that pension plans are able to pay current and future benefits to plan participants.4 • Pension plan sponsors would be able to invest funds in their businesses that they would otherwise have to contribute to their pensions, which could assist in the economic recovery.5 4 For example, in testimony to the House Subcommittee on Health, Employment, Labor, and Pensions of the House Education and Workforce Committee, Ken Porter, a pension plan consultant and former Corporate Chief Actuary for The DuPont Company, called current interest rates “artificially low.” His testimony is available at http://edworkforce.house.gov/UploadedFiles/02.02.12_porter.pdf. 5 See, for example, Hazel Bradford, a reporter for Pensions and Investments, “Pension Funding Changes Could Offer (continued...) Congressional Research Service 5 PBGC and Defined Benefit Pension Plan Funding Issues • Although funding relief could allow companies to use funds for investment purposes rather than pension contributions, plan sponsors may be reluctant to use funding relief if restrictions were attached to the use of funds saved. Such a restriction may have limited the use of the funding relief granted in 2010.6 • Pension plan contributions are obligations that have been willingly incurred by pension plan sponsors. Some have suggested that changes to pension plan funding rules might assist some companies to evade these obligations. In addition, while some plan sponsors may be facing financial difficulty, some plan sponsors may be able to meet their funding obligations. A recent article noted that “American corporations are sitting on record amounts of cash.”7 • Changes to pension plan funding rules could exacerbate current pension plan underfunding.8 Pension plan contributions are an obligation incurred by companies and greater underfunding could lead to greater losses for PBGC if these underfunded plans are terminated and are trusteed by PBGC.9 Proposals in S. 1813, Moving Ahead for Progress in the 21st Century (MAP-21), as Passed by the Senate on March 14, 2012 S. 1813, Moving Ahead for Progress in the 21st Century (MAP-21), would, among other provisions, affect pension plan funding. These provisions would (1) extend an exception to the tax on use of excess pension plan assets if the assets are used for retiree health insurance, (2) allow for the first time the use of excess pension plan assets for retiree life insurance, and (3) place upper and lower bounds on the interest rates that pension plans use to value plan liabilities. S. 1813 was passed by the Senate on March 14, 2012. The Senate incorporated S. 1813, as passed by the Senate on March 14, 2012, into H.R. 4348 as an amendment on April 24, 2012.10 (...continued) Some Relief,” Pensions&Investments, March 19, 2012, available at http://www.pionline.com/article/20120319/ PRINTSUB/303199978/pension-funding-changes-could-offer-some-relief. 6 The 2010 funding relief required additional pension plan contributions from plan sponsors who chose funding relief and who (1) provided excess compensation to company executives, (2) engaged in stock buybacks above specified levels, or (3) paid dividends to shareholders above specified levels. For example, the Business Roundtable, which describes itself as an association of chief executive officers of leading U.S. companies, indicated that less than 5% of eligible companies elected the funding relief that became available in 2010. Their statement is available at http://businessroundtable.org/news-center/pension-funding-stabilization-communication-to-key-senate-staff/. 7 See, for example, Jacqueline Doherty, a reporter for Barron’s, “Where Is All That Corporate Cash, Anyway?,” Barron’s Online, December 10, 2011, available at http://online.barrons.com/article/ SB50001424052748704048804577082712227921128.html#articleTabs_panel_article%3D1. 8 See, for example, Fitch Ratings, a credit rating agency that provides analysis of financial securities, “Pension Funding Relief May Again Prove Counterproductive,” March 8, 2012, available at http://www.fitchratings.com/web/en/ dynamic/articles/Pension-Funding-Relief-May-Again-Prove-Counterproductive.jsp. 9 See, for example, Roger Lowenstein, a financial journalist, “Don’t Let Corporations Slash Pension Payments,” Bloomberg, March 11, 2012, available at http://www.bloomberg.com/news/2012-03-11/don-t-let-corporations-slashpension-payments-roger-lowenstein.html. 10 S. 1813 was introduced by Senator Barbara Boxer on November 7, 2011, and would, among other purposes, reauthorize federal-aid highway and highway safety construction programs. H.R. 4348, introduced by Representative John Mica on April 16, 2012, would, among other purposes, also reauthorize federal-aid highway and highway safety construction programs. Congressional Research Service 6 PBGC and Defined Benefit Pension Plan Funding Issues Use of Excess Pension Assets for Retiree Health and Life Insurance In general, the Internal Revenue Code (IRC) imposes an excise tax if a pension plan sponsor withdraws assets from a pension plan, even if the plan has sufficient assets from which to pay future benefit obligations. The IRC provides an exception to the excise tax if a pension plan has assets in excess of 120% of the present value of future benefit obligations and the transfer is for the payment of retiree medical benefits. This provision is set to expire on December 31, 2013. Section 40310 of S. 1813, as passed by the Senate on March 14, 2012, would extend this provision through December 31, 2021. Section 40311 of S. 1813, as passed by the Senate on March 14, 2012, would allow the transfer of excess pension assets to pay for retiree group term life insurance. The Joint Committee on Taxation (JCT) estimated that these provisions would increase federal revenues by $139 million from FY2012 to FY2017 and $363 million from FY2012 to FY2022.11 Segment Rate Stabilization The Pension Protection Act of 2006 (PPA; P.L. 109-280) specified that pension plans discount their future benefit obligations using one of three discount rates. The rate to be used, called a segment rate, depends on the date on which the benefit obligation is expected to be paid and the corresponding rates on the corporate bond yield curve.12 The segment rates are calculated as the average of the corporate bond yields within the segment for the preceding 24 months. The first segment is for benefits payable within five years. The second segment is for benefits payable in 5 to 15 years. The third segment is for benefits payable in 15 years or later. The 24-month segment rates in June 2012 are 1.84% for the first segment, 4.79% for the second segment, and 5.90% for the third segment.13 Section 40312 of S. 1813, as passed by the Senate on March 14, 2012, would allow for the segment rates to be adjusted if they are below or above specified (called the “applicable”) minimum and maximum percentages of the average of the rates for the preceding 25 years.14 Segment rates that are lower than the applicable minimum percentage of the average of the corporate bond yields for the preceding 25 years would be set to the applicable minimum percentage of the average. Segment rates that are higher than the applicable maximum percentage of the average of the segment rates for the preceding 25 years would be set at the applicable maximum percentage of the average. Figure 1 shows a hypothetical example of how segment rates would be determined under the proposal. The red line shows the average of a segment’s interest rates for the preceding 25 years. 11 See U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects Of The Revenue Provisions Contained In S. 1813, As Amended, The “Highway Investment, Job Creation, And Economic Growth Act Of 2012”, prepared by The Joint Committee on Taxation, 112th Cong., 2nd sess., March 14, 2012, JCX-26-12 (Washington: GPO, 2012), available at https://www.jct.gov/publications.html?func=startdown&id=4410. 12 The yield curve is a graph that relates the maturity of a bond to the interest rate that bondholders receive for a bond of that maturity. 13 The U.S. Treasury updates the segment rates monthly. They are available at http://www.irs.gov/retirement/article/ 0,,id=174520,00.html. 14 In Section 40312 of S. 1813, the 25-year period would end on September 30 of the calendar year preceding the calendar year in which the plan year begins. Congressional Research Service 7 PBGC and Defined Benefit Pension Plan Funding Issues The blue lines indicate the minimum and maximum rates around the 25-year average. The shaded yellow area is the range around the 25-year average in which segment rates could fall without being adjusted. The black line indicates hypothetical segment rates in six different months. The three scenarios possible for segment rates are: • Segment rates above the applicable range: If Treasury determined that the segment rate were above the maximum segment rate (points (1) and (2) in Figure 1), then under the proposed provision, Treasury would adjust the segment rate downward until it equaled the proposed maximum segment rate (the green dots in Figure 1). • Segment rates within the applicable range: If Treasury determined that the segment rate were at or below the maximum segment rate and at or above the minimum segment rate (points (3) and (4) in Figure 1), Treasury would not adjust the segment rates. • Segment rates below the applicable range: If Treasury determined that the segment rate were below the minimum segment rate (points (5) and (6) in Figure 1), then Treasury would adjust the interest rate upward until it equaled the proposed minimum segment rate (the pink dots in Figure 1). CRS has not estimated the amount by which segment rates as currently calculated are lower than proposed minimum segment rates. Congressional Research Service 8 PBGC and Defined Benefit Pension Plan Funding Issues Figure 1. Hypothetical Application of Segment Rate Stabilization Provision as Found in S. 1813, as Passed by the Senate on March 14, 2012 Source: Congressional Research Service. Note: In this hypothetical example, under the segment rate stabilization provision, interest rates at points (1) and (2) are higher than the maximum segment rate and would be adjusted downward; interest rates at points (3) and (4) would not be adjusted; and interest rates at points (5) and (6) are lower than the minimum segment rate and would be adjusted upward. In Section 40312 of S. 1813, as passed by the Senate on March 14, 2012, the minimum percentage below the 25-year average segment rate would be decreased, and the maximum percentage above the 25-year average segment rate would be increased, each year from 2013 to 2015. These proposed minimum and maximum percentages are listed in Table 2. For example, the first segment rate (for benefits payable within five years) is calculated as the average of shortterm corporate bond yields for the previous 24 months. For June 2012, this first segment rate is 1.84%. If this segment rate is less than 90% of the average of corporate bond yields for the preceding 25 years, then, for the purposes of calculating pension obligations that will be paid within 5 years, the segment rate would be adjusted upward until it equaled 90% of the average for the preceding 25 years. The minimum percentage would decrease from 90% in 2012 to 70% after 2015 and the maximum percentage would increase from 110% in 2012 to 130% after 2015. This means that the shaded area of Figure 1 would be larger over time and, potentially, segment rates that fall outside the allowable range in a given year (and would, therefore, be adjusted) may fall in the allowable range in a future year (and would, therefore, not be adjusted). Congressional Research Service 9 PBGC and Defined Benefit Pension Plan Funding Issues Table 2. Applicable Minimum and Maximum Interest Rate Percentages of 25 Year Averages for Pension Funding in S. 1813, as Passed by the Senate on March 14, 2012 Calendar Year Applicable Minimum Percentage Applicable Maximum Percentage 2012 90% 110% 2013 85% 115% 2014 80% 120% 2015 75% 125% After 2015 70% 130% Source: Congressional Record, March 13, 2012, p. S1625. The JCT estimated that from FY2012 to FY2017, this provision would increase tax revenues by $16.7 billion, increase PBGC premiums by $625.0 million, and result in an increase in the OldAge, Survivors, and Disability Insurance (OASDI or Social Security) trust fund of $792.0 million. The JCT estimated that from FY2012 to FY2022, this provision would increase tax revenues by $8.17 billion, increase PBGC premiums by $650.0 million, and result in a decrease in the OASDI trust fund of $73.0 million.15 Interest rates have generally declined over the past 25 years. Figure 2 shows the yield on longterm corporate bonds that are rated Aaa by Moody’s Investors Services from January 1986 to May 2012.16 These rates would be a component of long-term segment rates. Treasury calculates segment rates from a variety of corporate bond maturities, including short-, medium-, and longterm bonds. While short- and medium-term yields are generally lower than 30-year bond yields, the trend in yields for short- and medium-term bonds would be similar to the trend in yields for long-term bonds shown in Figure 2. The 24-month segment rates in June 2012 are 1.84% for the first segment, 4.79% for the second segment, and 5.90% for the third segment. Given that the segment rate stabilization proposal would use interest rates that are averages of 25 years’ prior rates, the 25-year average of the segment rates would likely decrease over the next few years. 15 See U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects Of The Revenue Provisions Contained In S. 1813, As Amended, The “Highway Investment, Job Creation, And Economic Growth Act Of 2012”, prepared by The Joint Committee on Taxation, 112th Cong., 2nd sess., March 14, 2012, JCX-26-12 (Washington: GPO, 2012), available at https://www.jct.gov/publications.html?func=startdown&id=4410. 16 Aaa bonds are rated by Moody’s to have the lowest default risk, and therefore have the lowest yields among corporate bonds. The Federal Reserve, which provides data on many interest rate series, notes that Moody’s Aaa Corporate Bond Yield series tries to include bonds with remaining maturities as close as possible to 30 years. Generally, interest rates are higher for bonds of longer maturities (e.g., the yield on 30 year bonds is higher than the yield on 10 year bonds) and for bonds in which the probability of default is higher (e.g., the yields for corporate bonds are higher than the yields for U.S. government securities and the yields for the bonds of corporations in poor financial condition are higher than for the bonds of corporations in good financial condition). The Federal Reserve’s interest rate data are available at http://research.stlouisfed.org/fred2/categories/22. Congressional Research Service 10 PBGC and Defined Benefit Pension Plan Funding Issues Figure 2. Moody’s Seasoned Aaa Corporate Bond Yields January 1986 to May 2012 12.0% 10.0% Yield 8.0% 6.0% 4.0% 2.0% 0.0% Jan 1986 Jan 1988 Jan 1990 Jan 1992 Jan 1994 Jan 1996 Jan 1998 Jan 2000 Jan 2002 Jan 2004 Jan 2006 Jan 2008 Jan 2010 Jan 2012 Source: Board of Governors of the Federal Reserve System. Notes: The Federal Reserve Board notes that the Moody’s series tries to include bonds with remaining maturities as close as possible to 30 years. The U.S. Treasury calculates segment rates from a variety of corporate bond maturities, including short-, medium-, and long-term bonds. Proposal to Use Segment Rate Stabilization and PBGC Premium Increases to Offset Freeze in Student Loan Interest Rates Senate Majority Leader Harry Reid, in a letter dated June 7, 2012, to Senate Minority Leader Mitch McConnell and Speaker of the House John Boehner, offered two proposals to offset a proposed one-year extension of current student loan interest rates.17 Senator Reid’s proposals would (1) use the segment rate stabilization provision adopted in S. 1813, as passed by the Senate on March 14, 2012, and (2) increase the premiums that pension plan sponsors pay to PBGC.18 The letter did not indicate the amount by which PBGC premiums would increase. To date, S. 1813 has not included any proposals to increase PBGC premiums.19 17 For more information on the interest rates charged on student loans, see CRS Report R42515, Interest Rates on Subsidized Stafford Loans to Undergraduate Students, by David P. Smole. 18 See “Reid Offers Bipartisan Proposal To Fund Student Loan Bill” available on the Senate Democrats website at http://democrats.senate.gov/2012/06/07/reid-offers-bipartisan-proposal-to-fund-student-loan-bill. 19 For more information on proposals to increase PBGC premiums, see CRS Report R42521, Proposals to Change Pension Benefit Guaranty Corporation’s (PBGC) Premium Structure: Issues for Congress, by John J. Topoleski. Congressional Research Service 11 protection. PBGC Administration PBGC is a government-owned corporation. A three-member board of directors, chaired by the Secretary of Labor, administers the Corporation. The Secretary of Commerce and the Secretary of the Treasury are the other members of the board of directors. The Director of PBGC is appointed by the President with the advice and consent of the Senate. ERISA also provides for a sevenmember Advisory Committee, appointed by the President, for staggered three-year terms. The Advisory Committee advises PBGC on issues, such as investment of funds, plan liquidations, and other matters. The Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141) altered some of the governance structures of PBGC. Some of these changes include setting the term of PBGC Director at five years, unless removed by the President or by the board of directors; requiring that the Board of Directors meet at least four times each year; and establishing a Participant and Plan Sponsor Advocate within PBGC to act as a liaison between PBGC, participants in plans trusteed by PBGC, and the sponsors of pension plans insured by PBGC. PBGC Financing PBGC is required by ERISA to be self-supporting and receives no appropriations from general revenue. ERISA states that the “United States is not liable for any obligation or liability incurred by the corporation,”1 and some Members of Congress have expressed a reluctance to consider providing financial assistance to PBGC.2 The most reliable source of PBGC revenue is the 1 See ERISA 4002 § 1302(g)(2) and 29 U.S.C. 1302 § (g)(2). For example, Chairman Phil Roe and (at the time) Ranking Member Robert Andrews, of the Subcommittee on Health, Employment, Labor, and Pensions in the House Education and Workforce Committee, both expressed reservations about providing government financial assistance for PBGC. See U.S. Congress, House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions, Examining the Challenges Facing PBGC (continued...) 2 Congressional Research Service 1 Pension Benefit Guaranty Corporation (PBGC): A Primer premiums set by Congress and paid by the private-sector employers that sponsor DB pension plans. Other sources of income are assets from terminated plans taken over by PBGC, investment income, and recoveries collected from companies when they end underfunded pension plans. P.L. 96-364 requires that PBGC’s receipts and disbursements be included in federal budget totals. Premiums The sponsors of private-sector pension plans pay a variety of premiums to PBGC. The sponsors of single-employer and multiemployer pension plans pay a flat-rate, per-participant premium. The sponsors of underfunded single-employer pension plans pay an additional premium that is based on the amount of plan underfunding. In addition, pension plans that are terminated in certain situations pay a per-participant premium per year for three years after termination. In 2014, the premiums are • Single-employer flat-rate premium: The sponsors of single-employer DB pension plans pay an annual premium of $49 for each participant in the plan. • Single-employer variable-rate premium: In addition to the flat-rate premium, the sponsors of underfunded single-employer DB pension plans pay an additional annual premium of $14 for each $1,000 of unfunded vested benefits.3 There is a per-participant limit of $412 for this premium. • Multiemployer flat-rate premium: The sponsors of multiemployer DB pension plans pay an annual premium of $12 for each participant in the plan. • Single-employer termination premium: The sponsors of single-employer DB pension plans that end in certain situations4 pay an annual premium of $1,250 per participant per year for three years following plan termination.5 MAP-21 (P.L. 112-141) and H.J.Res. 59, the vehicle for the December 2013 bipartisan budget agreement (P.L. 113-67), specified the following changes to the premiums that plan sponsors pay to PBGC. Since H.J.Res. 59 was enacted after MAP-21, the changes made by H.J.Res. 59 supersede the changes made by MAP-21. • Single-employer, flat-rate premiums: MAP-21 increased the single-employer flatrate premium to $42 per participant in 2013 and to $49 per participant in 2014. MAP-21 specified that after 2014, the flat-rate premium was to be indexed for (...continued) and Defined Benefit Pension Plans, 112th Cong., 2nd sess., February 2, 2012, 112-50 (Washington: GPO, 2012) and U.S. Congress, House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions, Strengthening the Multiemployer Pension System: What Reforms Should Policymakers Consider?, 113th Cong., 1st sess., June 12, 2013. 3 Vested benefits are those benefits that a participant has earned a right to receive from a pension plan. Participants are entitled to their vested benefits even if they leave the pension plan or if the plan terminates. 4 The termination premium applies to plans that end in distress terminations in which ERISA § 4044(c) applies, unless certain conditions about the plan’s sponsors apply. For more information, see Termination Premium Payment Package, including PBGC Form T, available from PBGC at http://www.pbgc.gov/documents/Form-T-package-2014.pdf. 5 The termination premium is $2,500 for airlines that chose the funding relief available under Section 402 of the Pension Protection Act of 2006 (PPA; P.L. 109-280) if the plan terminated within five years of choosing the funding relief. Congressional Research Service 2 Pension Benefit Guaranty Corporation (PBGC): A Primer increases in the annual rate of growth in the average national wage. H.J.Res. 59 increased the single-employer flat-rate premium to $57 in 2015 and $64 in 2016. After 2016, the flat-rate premium will be indexed to increases in the average national wage. • Single-employer, variable-rate premiums: MAP-21 increased the variable-rate premium by $4 per $1,000 of unfunded benefits in 2014 and by another $5 per $1,000 of unfunded vested benefits in 2015. The $4 increase in 2014 and $5 increase in 2015 occur after the prior year’s premium is increased for changes in the average national wage. After 2015, the variable rate was to be indexed for increases in the average national wage. H.J.Res. 59 increased the variable-rate premium in 2015 by an additional $10 over the 2014 rate (after the 2014 rate is indexed for increases in the average national wage) per $1,000 of unfunded vested benefits and by an additional $5 (after the 2015 rate is indexed for increases in the average national wage) in 2016 per $1,000 of unfunded vested benefits. After 2016, the variable-rate premium will be indexed to increases in the average national wage. • Single-employer, variable-rate premium cap: MAP-21 authorized a maximum variable-rate premium of $400 per participant beginning in 2013. After 2013, the maximum variable-rate premium is indexed for increases in the average national wage and is $412 in 2014. H.J.Res. 59 authorized a maximum variable-rate premium of $500 per participant beginning in 2016. • Multiemployer plan premiums: MAP-21 increased the premium by $2 per participant beginning in 2013. After 2013, the multiemployer plan premium will continue to be indexed for increases in the average national wage. H.J.Res. 59 did not authorize any changes to multiemployer plan premiums. The termination premium was not changed by either MAP-21 or H.J.Res. 59. Requirements for PBGC Coverage PBGC covers only those defined benefit plans that meet the qualification requirements of Section 401 of the Internal Revenue Code (IRC).6 Plans must meet these requirements to receive the tax benefits available to qualified pension plans. If a plan meets the requirements of IRC Section 401, the employer’s contributions to the plan are treated as a tax-deductible business expense, and neither the employer’s contributions to the plan nor the investment earnings of the plan are treated as taxable income to the participants. When a pension plan participant begins to receive income from the plan, it is taxed as ordinary income. Generally, to be qualified under the IRC, a pension plan must be established with the intent of being a permanent and continuing arrangement; must provide definitely determinable benefits;7 may not discriminate in favor of highly compensated employees with respect to coverage, contributions, or benefits; and must cover a minimum number or percentage of employees. 6 See 26 U.S.C. § 401. See 25 U.S.C. § 401(a)(25) and 26 CFR § 1.401(a)-1. Definitely determinable benefits are benefits that are based on actuarial assumptions over which an employer does not have the discretion to make changes. For example, a benefit that could be changed based on the employer’s profits would not be definitely determinable. 7 Congressional Research Service 3 Pension Benefit Guaranty Corporation (PBGC): A Primer Pension plans specifically excluded by law from being insured by PBGC include governmental plans, church plans, plans of fraternal societies financed entirely by member contributions, plans maintained by certain professionals (such as physicians, attorneys, and artists) with 25 or fewer participants, and plans established and maintained exclusively for substantial owners of businesses.8 In addition, defined contribution plans (such 401(k) and 403(b) plans) are not insured by PBGC. Pension Benefit Guaranty PBGC’s single-employer and multiemployer insurance programs operate differently. In the single-employer program, PBGC becomes the trustee of the terminated, underfunded single-employer DB pension plans. The assets of the terminated plan are placed in a trust fund operated by PBGC. The participants in the trusteed plans receive their benefits from PBGC. In the multiemployer program, PBGC does not become the trustee of plans. PBGC makes loans to multiemployer DB pension plans when the plans become insolvent. An insolvent multiemployer plan has insufficient assets available from which to pay participant benefits. Single-Employer Insurance Program An employer can voluntarily terminate a single-employer plan in either a standard or distress termination.9 The participants and PBGC must be notified of the termination. PBGC may involuntarily terminate an underfunded plan if the sponsor is unable to fund its pension obligations. Standard Terminations A company may voluntarily end its pension plan if the plan’s assets are sufficient to cover benefit liabilities. Generally, benefit liabilities equal all benefits earned to date by plan participants, including vested and nonvested benefits (which automatically become vested at the time of termination), plus certain early retirement supplements and subsidies. Benefit liabilities also may include certain contingent benefits.10 If assets are sufficient to cover benefit liabilities (and other termination requirements, such as notice to employees, have not been violated), the plan distributes benefits to participants. The plan provides for the benefit payments it owes by purchasing annuity contracts from an insurance company, or otherwise providing for the payment of benefits, for example, by providing the benefits in lump-sum distributions. Assets in excess of the amounts necessary to cover benefit liabilities may be recovered by the employer in an asset reversion.11 The asset reversion is included in the gross income of the employer and is also subject to a nondeductible excise tax. The excise tax is 20% of the amount 8 See 29 U.S.C. § 1321. More information is available in CRS Report RS22624, The Pension Benefit Guaranty Corporation and SingleEmployer Plan Terminations, by Jennifer A. Staman and Erika K. Lunder. 10 Contingent benefits are benefits that are available when certain specified events occur. For example, a plan might provide “shutdown benefits,” which are additional benefits should a plant or facility close. 11 An asset reversion is cash and property received by the sponsor of a DB pension plan. See 26 U.S.C. § 4980(c)(2). 9 Congressional Research Service 4 Pension Benefit Guaranty Corporation (PBGC): A Primer of the reversion if the employer establishes a qualified replacement plan or provides certain benefit increases in connection with the termination. Otherwise, the excise tax is 50% of the reversion amount. PBGC Trusteeship When an underfunded plan terminates in a distress or involuntary termination, the plan goes into PBGC receivership. PBGC becomes the trustee of the plan, takes control of any plan assets, and assumes responsibility for liabilities under the plan. PBGC makes payments for benefit liabilities promised under the plan with assets received from two sources: assets in the plan before termination and assets recovered from employers. The balance, if any, of guaranteed benefits owed to beneficiaries is paid from PBGC’s revolving funds. Distress Terminations If assets in the plan are not sufficient to cover benefit liabilities, the employer may not terminate the plan unless the employer meets one of four criteria necessary for a “distress” termination: 1. The plan sponsor, and every member of the controlled group (companies with the same ownership) of which the sponsor is a member, has filed or had filed against it a petition seeking liquidation in bankruptcy or any similar federal law or other similar state insolvency proceedings; 2. The plan sponsor, and every member of the sponsor’s controlled group, has filed or had filed against it a petition to reorganize in bankruptcy or similar state proceedings. This criterion is also met if the bankruptcy court (or other appropriate court) determines that, unless the plan is terminated, the employer will be unable to continue in business outside the reorganization process and approves the plan termination; 3. PBGC determines that termination is necessary to allow the employer to pay its debts when due; or 4. PBGC determines that termination is necessary to avoid unreasonably burdensome pension costs caused solely by a decline in the employer’s work force. These requirements were added by the Single Employer Pension Plan Amendments Act of 1986 (SEPPAA; P.L. 99-272) and modified by the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) and the Retirement Protection Act of 1994 (RPA; P.L. 103-465). They are designed to ensure that the liabilities of an underfunded plan remain the responsibility of the employer, rather than PBGC, unless the employer meets strict standards of financial need indicating genuine inability to continue funding the plan. Involuntary Terminations PBGC may terminate a plan involuntarily, either by agreement with the plan sponsor or pursuant to a federal court order. PBGC may institute such proceedings only if the plan in question has not met the minimum funding standards, will be unable to pay benefits when due, has a substantial owner who has received a distribution greater than $10,000 (other than by reason of death), or the long-run loss to PBGC with respect to the plan is expected to increase unreasonably if the plan is not terminated. PBGC must terminate a plan if the plan is unable to pay benefits that are currently Congressional Research Service 5 Pension Benefit Guaranty Corporation (PBGC): A Primer due. A federal court may order termination of the plan to protect the interests of participants, to avoid unreasonable deterioration of the plan’s financial condition, or to avoid an unreasonable increase in PBGC’s liability under the plan. Table 1 provides information on the number of terminations since 1974 by single-employer DB pension plans and the number of these terminations that resulted in PBGC becoming trustee of the pension plan. From FY1974 through FY2012, PBGC became the trustee of 4,447 singleemployer DB pension plans. In FY2013, PBGC became the trustee of 111 new plans. The number of single-employer plan terminations that result in claims against PBGC is a small fraction of all plan terminations. Most pension plan terminations are standard terminations. Over PBGC’s history, terminations of underfunded plans have made up 3.2% of all terminations. Congressional Research Service 6 Pension Benefit Guaranty Corporation (PBGC): A Primer Table 1. Number of Standard and Trusteed Pension Plan Terminations Fiscal Year Number of Standard Termination Filings Trusteed Terminations 1974-1979 7,955 586 1980-1984 28,025 622 1985-1989 42,599 537 1990-1990 24,171 694 1995-1999 15,089 444 2000 1,892 73 2001 1,748 117 2002 1,452 186 2003 1,203 172 2004 1,198 164 2005 1,108 129 2006 1,247 89 2007 1,233 77 2008 1,405 82 2009 1,294 184 2010 1,308 144 2011 1,400 85 2012 1,332 61 2013 a 111 135,659 4,447 Total Source: Table S-3 Pension Benefit Guaranty Corporation Pension Insurance Data Book, 2012, and Pension Benefit Guaranty Corporation (PBGC), PBGC Annual Report 2013, http://www.pbgc.gov/documents/2013annual-report.pdf. Notes: In a standard termination, a pension plan has sufficient assets from which to pay 100% of the participants’ promised benefits. In a trusteed termination, PBGC becomes trustee of the plan and participants receive their benefits, up to a statutory maximum amount, from PBGC. a. The number of standard terminations in FY2013 is not yet available. Employer Liability to PBGC Following a distress or involuntary termination, the plan’s sponsor and every member of that sponsor’s controlled group are liable to PBGC for the plan’s shortfall. The shortfall is measured as the value of the plan’s liabilities as of the date of plan’s termination minus the fair market value of the plan’s assets on the date of termination. The liability is joint and several, meaning that each member of the controlled group, can be held responsible for the entire liability. Generally, the obligation is payable in cash or negotiable securities to PBGC on the date of termination. Failure to pay this amount upon demand by PBGC may trigger a lien on the property of the contributing employer’s controlled group. Often, however, a plan undergoing a distress termination is sponsored by a company that is in bankruptcy proceedings, in which case PBGC does not have Congressional Research Service 7 Pension Benefit Guaranty Corporation (PBGC): A Primer legal authority to create (or “perfect”) a lien against the plan sponsor. In such instances, PBGC has the same legal standing as other creditors of the plan sponsor, and its ability to recover assets is limited. Benefit Payments When an underfunded plan terminates, the benefits that PBGC will pay depend on the statutory limit on guaranteed benefits, the amount of terminated plan’s assets, and recoveries by PBGC from the employer that sponsored the terminated plan. Guaranteed Benefits Within limits set by Congress, PBGC guarantees any retirement benefit that was nonforfeitable (vested) on the date of plan termination other than benefits that vest solely on account of the termination, and any death, survivor or disability benefit that was owed or was in payment status at the date of plan termination. Generally, only that part of the retirement benefit that is payable in monthly installments (rather than, for example, lump-sum benefits payable to encourage early retirement) is guaranteed. Retirement benefits that commence before the plan’s normal age of retirement are guaranteed, provided they meet the other conditions of guarantee. Contingent benefits (for example, early retirement benefits provided only if a plant shuts down) are guaranteed only if the triggering event occurs before plan termination. Following enactment of the Pension Protection Act of 2006 (PPA; P.L. 109-280), PBGC guarantee for such benefits is phased in over a five-year period commencing when the event occurs.12 Benefits for Participants in Single-Employer Pension Plans ERISA sets a maximum on the individual benefit amount that PBGC can guarantee.13 The ceiling for single-employer plans is adjusted annually for national wage growth. The maximum pension guarantee is $59,320 a year for workers aged 65 in plans that terminate in 2014. This amount is adjusted annually and is decreased if a participant begins receiving the benefit before age 65 or if the pension plan provides benefits in some form other than equal monthly payments for the life of the retiree. The benefit is increased if a participant begins receiving the benefit after the age of 65. The reduction in the maximum guarantee for benefits paid before age 65 is 7% for each of the first five years under age 65, 4% for each of the next five years, and 2% for each of the next 10 years.14 The reduction in the maximum guarantee for benefits paid in a form other than a single life annuity depends on the type of benefit, and if there is a survivor’s benefit, the percentage of 12 For example, PBGC pays 20% of a participant’s shutdown benefit if the benefit was adopted within one year prior to plan termination. The percentage increases from year to year. If the benefit was adopted more than five years prior to plan termination, PBGC pays 100% of the participant’s shutdown benefit. For more information, see Pension Benefit Guaranty Corporation, “Benefits Payable in Terminated Single-Employer Plans; Limitations on Guaranteed Benefits; Shutdown and Similar Benefits,” 79 Federal Register 25667-25675, May 6, 2014. 13 The maximum benefit is different for participants in terminated single-employer pension plans compared with participants in insolvent multiemployer pension plans. 14 Further information on the maximum benefit is available in 29 C.F.R. § 4022.23, Computation of Maximum Guaranteeable Benefits. Congressional Research Service 8 Pension Benefit Guaranty Corporation (PBGC): A Primer the benefit continuing to the surviving spouse and the age difference between the participant and spouse.15 Only “basic benefits” are guaranteed. These include benefits beginning at normal retirement age (usually 65), certain early retirement and disability benefits, and benefits for survivors of deceased plan participants. Only vested benefits are insured. The median monthly benefit received in FY2012 was $284. PBGC indicated that more than 80% of PBGC recipients received their full benefits.16 Assets of a terminated plan are allocated to pay benefits according to a priority schedule established by statute. Under this schedule, some nonguaranteed benefits are payable from plan assets before certain guaranteed benefits. For example, benefits of participants who have been receiving pension payments for more than three years have priority over guaranteed benefits of participants not yet receiving payments. PBGC also is required to pay participants a portion of their unfunded, nonguaranteed benefits based on a ratio of assets recovered from the employer to the amount of PBGC’s claim on employer assets (called Section 4022(c) benefits). Multiemployer Pension Insurance Program In the case of multiemployer plans, PBGC insures plan insolvency, rather than plan termination. Accordingly, a multiemployer plan need not be terminated to qualify for PBGC financial assistance. A plan is insolvent when its available resources are not sufficient to pay the plan benefits for the plan year in question, or when the sponsor of a plan in reorganization reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available resources will not be sufficient to pay benefits that come due in the next plan year. If it appears that available resources will not support the payment of benefits at the guaranteed level, PBGC will provide the additional resources needed as a loan, which PBGC indicates are rarely repaid.17 PBGC may provide loans to the plan year after year. If the plan recovers from insolvency, it must begin repaying loans on reasonable terms in accordance with regulations. Only one multiemployer plan has repaid any of its financial assistance.18 15 A single life annuity is a benefit which pays an equal monthly benefit for the life of the participant. A survivor’s annuity pays an equal monthly benefit for the longer of the life of the participant and the participant’s spouse. The monthly payment in a survivor’s annuity is typically less than the amount of the single life annuity. 16 This is based on a 2006 study by PBGC. See Pension Benefit Guaranty Corporation, PBGC’s Guarantee Limits—an Update, September 2008, http://www.pbgc.gov/docs/guaranteelimits.pdf. CRS is not aware of a more recent study regarding the percentage of participants who receive their full pension benefits. 17 See Pension Benefit Guaranty Corporation (PBGC), PBGC Annual Report 2013, p. 38, http://www.pbgc.gov/ documents/2013-annual-report.pdf. 18 See Pension Benefit Guaranty Corporation (PBGC), 2012 Pension Insurance Data Tables, table M-4, http://www.pbgc.gov/documents/2012-Data-Book-Tables.pdf. Congressional Research Service 9 Pension Benefit Guaranty Corporation (PBGC): A Primer Benefits for Participants in Multiemployer Pension Plans PBGC guarantees benefits to multiemployer plans as it does for single-employer plans, although a different guarantee ceiling applies. Multiemployer plans determine benefits by multiplying a flat dollar rate by years of service, so the benefit guaranty ceiling is tied to this formula. The benefit guarantee limit for participants in multiemployer plans equals a participant’s years of service multiplied by the sum of (1) 100% of the first $11 of the monthly benefit rate and (2) 75% of the next $33 of the benefit rate.19 For a participant with 30 years of service, the guaranteed limit is $12,870.20 This benefit formula is not adjusted for increases in the national wage index. Current Financial Status The most commonly used measure of PBGC’s financial status is its net financial position, which is the difference between PBGC’s assets and its liabilities. At the end of FY2013, PBGC’s assets were $84.9 billion, PBGC liabilities were $120.6 billion, and its net financial position was -$35.6 billion. PBGC’s main assets are the value of its trust fund and revolving funds.21 The trust fund contains the assets of the pension plans of which PBGC becomes trustee and the returns on the trust fund investments. The revolving funds contain the premiums that plan sponsors pay to PBGC, transfers from the trust fund that are used to pay for participants’ benefits, and returns on the revolving funds’ investments in U.S. Treasury securities. PBGC’s main liabilities are the estimated present values of (1) future benefits payments in the single-employer program and (2) future financial assistance to insolvent plans in the multiemployer program.22 Table 2 provides information on the net financial position of PBGC from FY2002 through FY2013. PBGC has had an end of fiscal year deficit each year since FY2002. 19 An accrual rate is a factor in the pension benefit formula (expressed either as a dollar amount or as a percentage of salary) at which a pension benefit is earned. In single-employer pension plans, the pension benefits formula is typically expressed as the number of years participating in the plan times the accrual rate (e.g., 1% or 2%) times a measure of salary (e.g., the average of the participant’s highest five years of salary). In multiemployer pension plans, the pension benefits formula is typically expressed as the number of months or years of service times a dollar amount. 20 This is calculated as [30 × ((100% × $11) + (75% ×$33)] = $1,072.50 per month, which is $12,870 per year. 21 Other assets include securities lending collateral and receivables. 22 Other liabilities include payables. PBGC’s benefit obligations are spread out over many years in the future. These future benefits are calculated and reported as current dollar values (also called present value). Benefits that are expected to be paid in a particular year in the future are calculated so they can be expressed as a current value. The process is called discounting and it is the reverse of the process of compounding, which projects how much a dollar amount will be worth at a point in the future. For more information, see the appendix in CRS Report R43305, Multiemployer Defined Benefit (DB) Pension Plans: A Primer and Analysis of Policy Options, by John J. Topoleski. Congressional Research Service 10 Pension Benefit Guaranty Corporation (PBGC): A Primer Table 2. PBGC Single and Multi-Employer Insurance Programs: Net Financial Position, FY2002 - FY2013 (billions of dollars) Fiscal Year Single-Employer Program Multiemployer Program Total PBGC Deficit 2002 $ -3.6 $ 0.2 $ -3.5 2003 -11.2 -0.3 -11.5 2004 -23.3 -0.2 -23.5 2005 -22.8 -0.3 -23.1 2006 -18.1 -0.7 -18.9 2007 -13.1 -1.0 -14.1 2008 -10.7 -0.5 -11.2 2009 -21.1 -0.9 -21.9 2010 -21.6 -1.4 -23.0 2011 -23.3 -2.8 -26.0 2012 -29.1 -5.2 -34.3 2013 -27.4 -8.3 -35.7 Source: PBGC Pension Insurance Data Books and FY2013 Annual Report. The weakness in the economy in 2001, particularly in the steel and airline industries, led to large and expensive plan terminations that created a deficit for PBGC. By the end of 2004, the singleemployer program had a deficit of $23.3 billion. The multiemployer program had a surplus from FY1982 to FY2002, but PBGC reported deficits each year since. Some policymakers are concerned with the financial condition of the multiemployer program.23 Both the single-employer and multiemployer programs are on the Government Accountability Office’s (GAO’s) list of high-risk government programs.24 Finances of the Single-Employer Insurance Program Table 3 shows that approximately 781,000 participants received monthly payments from PBGC in FY2012. The average monthly payment was $559 and the median monthly payment was $284. Approximately 28,000 participants received a lump-sum payment in FY2012, and the average amount of the lump-sum payment was $2,198. 23 For more information, see CRS Report R43305, Multiemployer Defined Benefit (DB) Pension Plans: A Primer and Analysis of Policy Options, by John J. Topoleski. 24 More information is available at http://www.gao.gov/highrisk/pension_benefit/why_did_study. Congressional Research Service 11 Table 3. Pension Benefit Guaranty Corporation (PBGC) Benefit Payments and Payees, 1997 - 2012 Single-Employer Insurance Program Periodic Pension Payments Lump-Sum Payments Average Payment Number of Deferred Payees (in thousands) 9 2,629 202 21 9 2,198 213 208 56 16 3,553 225 309 206 71 19 3,726 226 266 325 208 88 18 4,817 246 1,458 343 383 242 79 21 3,757 326 2003 2,401 457 453 275 87 22 4,220 375 2004 2,918 517 475 281 88 21 4,229 424 2005 3,607 683 487 286 78 17 4,633 489 2006 4,011 612 531 296 71 13 5,145 520 2007 4,179 630 539 281 87 17 5,154 534 2008 4,211 639 534 289 81 17 4,828 495 2009 4,409 743 598 305 69 12 4,289 565 2010 5,361 746 594 316 106 16 6,661 614 2011 5,172 775 579 287 168 48 3,517 595 2012 5,299 781 559 284 85 38 2,198 590 Total (millions) Payees in Year (thousands) Average Monthly Payment Median Monthly Payment 1997 800 204 316 212 23 1998 826 208 313 208 1999 844 214 311 2000 831 226 2001 954 2002 Fiscal Year Total (in Millions) Payees in Year (thousands) Source: Table S-20 Pension Benefit Guaranty Corporation Pension Insurance Data Book, 2012. Notes: Deferred payees are participants who are owed, but not yet receiving, benefits under the plan. Data for FY2013 is not yet available. Due to rounding of individual items, the average monthly payment may not be exactly equal to the number of payees divided by the total payments. CRS-12 Pension Benefit Guaranty Corporation (PBGC): A Primer Figure 1 displays the net financial position of PBGC’s single-employer program from FY1980 to FY2013. In FY1996, PBGC showed a surplus in its single-employer program for the first time in its history. That surplus peaked at $9.7 billion in FY2000, helped by the strong performance of the equity markets in the 1990s. Figure 1. Financial Position of the Single-Employer Insurance Program of the Pension Benefit Guaranty Corporation End of Fiscal Year: FY1980 to FY2013 Source: PBGC Pension Insurance Data Books and FY2013 Annual Report. Finances of the Multiemployer Insurance Program Table 4 indicates that 44 multiemployer plans received financial assistance in FY2013. The FY2013 actuarial report indicated that approximately 74,000 multiemployer plan participants received financial assistance in FY2013 and that approximately 811,000 participants in multiemployer plans were expected to receive financial assistance in the future.25 25 See Pension Benefit Guaranty Corporation, 2013 Actuarial Report, p. 20, http://www.pbgc.gov/Documents/2013actuarial-report.pdf. Congressional Research Service 13 Pension Benefit Guaranty Corporation (PBGC): A Primer Table 4. PBGC Multiemployer Insurance Program: Financial Assistance to Pension Plans Year Number of Plans Receiving Financial Assistance Total Amount of Financial Assistance (in millions) 1995 9 $4.3 1996 12 4.0 1997 14 4.5 1998 18 5.4 1999 21 19.2 2000 21 91.0 2001 22 4.5 2002 23 4.9 2003 24 5.0 2004 27 10.1 2005 29 13.8 2006 33 70.1 2007 36 71.9 2008 42 84.6 2009 43 85.6 2010 50 97.1 2011 49 114.3 2012 49 95.0 2013 44 89.0 Source: PBGC Pension Insurance Data Books and FY2013 Annual Report. Figure 2 indicates that the financial condition of the multiemployer insurance program has been worsening. The deficit in the multiemployer insurance program increased from $5.2 billion in FY2012 to $8.3 billion in FY2013. Congressional Research Service 14 Pension Benefit Guaranty Corporation (PBGC): A Primer Figure 2. Financial Position of the Multiemployer Insurance Program of the Pension Benefit Guaranty Corporation End of Fiscal Year: FY1980 to FY2013 Source: PBGC Pension Insurance Data Books and FY2013 Annual Report. PBGC and the Federal Budget PBGC’s budgetary cash flows are based on its premium income, interest income, benefit outlays, and the interaction of PBGC’s trust and revolving funds.26 The trust fund contains the assets of the pension plans of which PBGC becomes trustee and the returns on the trust fund investments. The revolving funds contain the premiums which plan sponsors pay to PBGC, transfers from the trust fund which are used to pay for participants’ benefits, and returns on the revolving funds’ investments in U.S. Treasury securities. PBGC Trust Fund When PBGC becomes trustee of a pension plan, the assets of the terminated pension plan are transferred to PBGC and placed in a non-budgetary trust fund. Transfers of assets to the trust fund do not appear in the federal budget and the assets of this trust fund do not appear on the federal 26 For more information, see Congressional Budget Office, A Guide to Understanding the Pension Benefit Guaranty Corporation, September 2005, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/66xx/doc6657/09-23guidetopbgc.pdf. Congressional Research Service 15 Pension Benefit Guaranty Corporation (PBGC): A Primer balance sheet. The assets of the trust fund are managed by private-sector money managers in accordance with an investment policy established by PBGC’s Board of Directors. The current investment policy establishes assets allocations of 30% for equities and other non-fixed income assets, and 70% for fixed income.27 Trust fund investments totaled $60.5 billion at the end of FY2013.28 PBGC Revolving Funds ERISA authorized the creation of seven revolving funds for PBGC, although only three revolving funds have been used by PBGC. The revolving funds contain the premiums paid by pension plan sponsors, returns on revolving funds’ investments, and transfers from the trust fund that are used to pay benefits. Each year, PBGC transfers fund from the trust fund to the revolving funds to pay for a share of participants’ benefits.29 The investments of the revolving funds are exclusively in U.S. Treasury securities. The assets of the revolving fund at the end of FY2013 were $1.0 billion for Fund 1, $1.7 billion for Fund 2, and $16.4 billion for Fund 7, for a total of $19.1 billion.30 The revolving funds are on-budget accounts: increases or decreases in the revolving funds appear as on-budget federal receipts and outlays. The funds’ gross outlays include PBGC benefit payments and administrative expenses and receipts include premiums paid, interest on federal securities, and reimbursements from the trust fund. Because increases in the premiums paid by pension plan sponsors to PBGC are increases in federal revenue, some groups have criticized recent PBGC premium increases because they feel increases in premiums are used to offset other federal spending, do not address the financial condition of PBGC, and may discourage employers from maintaining their DB pension plans.31 Future Financial Condition In its FY2013 Projections Report,32 PBGC estimated its financial condition over the next 10 years (1) the single-employer program’s deficit is likely to shrink and the multiemployer program is likely to run out of money. Although PBGC currently operates with a financial deficit, retirees’ 27 See Pension Benefit Guaranty Corporation (PBGC), “PBGC Board of Directors Approves New Investment Policy,” press release, May 26, 2011, http://www.pbgc.gov/news/press/releases/investment-policy.html. 28 See Pension Benefit Guaranty Corporation (PBGC), PBGC Annual Report 2013, p. 40, http://www.pbgc.gov/ documents/2013-annual-report.pdf. 29 A GAO report indicated that the formula for the transfer is net trust fund assets divided by the present value of future benefits excluding probable terminations. See U.S. Government Accountability Office, Pension Benefit Guaranty Corporation: Asset Management Needs Better Stewardship, GAO-11-271, June 2011, http://www.gao.gov/new.items/ d11271.pdf. 30 See Pension Benefit Guaranty Corporation (PBGC), PBGC Annual Report 2013, p. 40, http://www.pbgc.gov/ documents/2013-annual-report.pdf. 31 See, for example, Sean Forbes, “House Approves Budget Agreement That Includes Hikes in PBGC Premiums,” Pension & Benefits Reporter, December 17, 2013, or Interindustry Forecasting at the University of Maryland, Increasing. Pension. Premiums: The Impact on Jobs and Economic Growth, May 2014, http://www.nam.org/~/media/ 0948C22BD34742678A3DA9078EA28915/Increasing_Pension_Premiums_Full_Report_MAY2014.pdf. 32 The Projections Report was formerly called the Exposure Report. It is available at http://www.pbgc.gov/about/ projections-report.html. Congressional Research Service 16 Pension Benefit Guaranty Corporation (PBGC): A Primer benefits are not at immediate risk because the benefit obligations are paid out over several decades. PBGC estimated that the single-employer program is likely to remain in deficit over the next 10 years, although the deficit is likely is to shrink. The average estimate of PBGC’s simulations was a $7.6 billion deficit in 10 years and a 42.5% chance that the single-employer would not have a deficit in 2023.33 PBGC estimated that there is a 75% chance that the multiemployer program will be insolvent by 2023 and a 99% chance that the multiemployer program will be insolvent by 2033. This is a result of the likely insolvency of several large multiemployer pension plans. PBGC’s FY2013 Annual Report indicated that the multiemployer program’s reasonably possible exposure to future financial assistance would be $36.7 billion.34 Premium levels are likely inadequate to provide continued financial assistance to insolvent multiemployer plans. The financial assistance to these plans could exhaust PBGC’s ability to guarantee participants’ benefits. PBGC has indicated that once resources are exhausted in the PGBC’s multiemployer program, insolvent plans would be required to reduce benefits to levels that could be sustained through premium collections only.35 33 To estimate the likelihood of PBGC’s future financial condition, PBGC uses an internally developed computer modelling program that it calls the Pension Insurance Modelling System (SIMS). Separate models are used for the single-employer program (SE-SIMS) and the multiemployer program (ME-SIMS). For more discussion of SIMS, see Jeffrey R. Brown, Douglas J. Elliott, and Tracy Gordon, et al., A Review of the Pension Benefit Guaranty Corporation Pension Insurance Modeling System, Brookings Institution, September 11, 2013, http://www.brookings.edu/research/ papers/2013/09/11-review-pension-benefit-guaranty-corporation-pension. 34 Plans are classified as reasonably possible (for future financial assistance) if the plan is ongoing but is projected to be insolvent in 10 years to 20 years. 35 See Pension Benefit Guaranty Corporation, PBGC Insurance of Multiemployer Pension Plans, January 22, 2013, http://www.pbgc.gov/documents/pbgc-five-year-report-on-multiemployer-pension-plans.pdf. Congressional Research Service 17