PBGC Deficit Tripled in Last Three Months, Hits Record $33.5 Billion

The Pension Benefit Guaranty Corp. posted a record deficit of $33.5 billion for the first half of fiscal 2009, a shortfall that has nearly tripled in just six months.

The huge increase in the deficit, which was $11.2 billion as of September 30, 2008, was driven by $11 billion in completed and probable plan terminations during the first half of fiscal 2009, which ended March 31.

In addition, a drop in interest rates, which are used to value the agency’s liabilities, added about $7 billion to the deficit, while the agency sustained $3 billion in investment losses.

The grim numbers, which the PBGC disclosed Wednesday, May 20, in advance of a Senate Aging Committee hearing, reflect the struggling economy’s effects on the federal agency’s pension insurance program, which is funded by premiums paid by employers with defined-benefit plans and by investment income it earns on those premiums and on assets it acquires when it takes over failed pension plans.

The PBGC does not break out how much of the $11 billion in losses is from plans that terminated during the first six months of fiscal 2009 and how much is from probable terminations.

It is believed, though, that most of the $11 billion is from probable losses, which are terminations the PBGC believes are likely to happen.

Based on agency’s prior experience, most of probable terminations become actual terminations. From 1987 to 2007, about 80 percent of plans recorded initially as probable terminations later were taken over by the PBGC.

While the agency does not disclose company names of probable terminations, it notes that it is closely monitoring the auto manufacturing and supply industries. According to PBGC estimates, auto sector plans are underfunded by about $77 billion, of which $42 billion would be guaranteed by the PBGC if those plans failed.

While the PBGC said it has “sufficient funds to meet its benefit obligations for many years,” said Acting PBGC Director Vince Snowbarger in written testimony for the Aging Committee, “over the long term, the deficit must be addressed.”

The deficit could increase the likelihood that the PBGC will be forced to seek congressional approval to boost employer premiums. The base annual premium is $34 per plan participant.

The PBGC’s prior highest deficit, $23.5 billion, was in fiscal 2004. Until the latest spike, the deficit had been declining.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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