There's a sense of foreboding building at the Pension Benefit Guaranty Corp. nowadays.
Late last month, the insurer of the country's private defined benefit plans announced that the condition of single employer-provided pensions has greatly improved, and that projected deficits are expected to narrow dramatically in the next few years, thanks in large part to controversial premium increases shouldered by plan sponsors.
The prognosis was not nearly as positive for many of the nation's 1,400 multiemployer plans, in which multiple employers in the same industry typically contribute to a single pension fund and where the premiums are much smaller. In fact, it's rather bleak for about 10 percent of participants in these pooled plans; the PBGC is projecting insolvencies affecting 1.5 million multiemployer beneficiaries are "more likely and more imminent."
The potential loss of billions of dollars in participant benefits isn't the only issue casting a cloud over the PBGC.
Key provisions of the 2006 Pension Protection Act are set to expire at the end of December.
The PPA offered relief to the most distressed plans by allowing sponsors to reduce benefits, a tactic that had previously been forbidden under ERISA.
The law also restricted distressed plans from increasing benefits, or issuing lump-sum payments to participants upon retirement.
Another important PPA provision eliminated an excise tax, levied by the IRS, on sponsors whose plans are underfunded. The intention of the tax was to encourage sponsors to make annual minimum contributions to their plans all along. Congress eliminated it to relieve pressure on strained plans in the hopes that sponsors would not terminate their defined benefits.
Plan sponsors, particularly those in underfunded multiemployer plans, took advantage of the PPA in a big way. In 2010, $2 billion in excise taxes were avoided. Another $2 billion in liabilities were reduced thanks to adjustments allowed under the law.
Absent an act of Congress, these relief measures won't be available going forward.
So, again, it's no wonder the PBGC is on edge.
Enter the Advocate
Later this year, Constance Donovan plans to go before the relevant subcommittees in both chambers of Congress and report her findings on the state of affairs at the PBGC.
As the Participant and Plan Sponsor Advocate at the PBGC, Donovan's job is to represent the interests of plan sponsors before Congress.
Donovan's position was created with the enactment of the Moving Ahead for Progress in the 21st Century Act, which was signed into law in July of 2012. She is the first person to hold the title at the PBGC.
She answers to PBGC Director Josh Gotbaum but is supposed to offer an independent voice. "We have many things we agree upon," says Donovan, "and a few where we don't. There is a mutual respect. He's very committed to his responsibilities in managing the PBGC."
But can an internal liaison between plan sponsors at the PBGC – one whose boss is calling for greater latitude in assessing premiums and regulations over plan sponsors – really be free to fully advocate on behalf of sponsors' interests, which are often in opposition to the PBGC's agenda?
Sponsors wondering about that question may be relieved to hear just how seriously Donovan is taking up their cause.
"We absolutely have to be able to better explain ourselves," says Donovan. "And we have to do a better job of understanding who the customer is — the plan participants, the plan sponsors, the trade and advocacy groups. We are a government agency here to help business. We have to have a better business sense."
The possibility of premium increases has many sponsors up in arms, but to Donovan, it's the enforcement of the 4062(e) regulation that highlights where the PBGC could better deploy some of the common sense she suggests is sometimes missing.
The ERISA provision allows the PBGC to assess liability costs to a sponsor when an employer ceases "operations at a facility in any location."
The problem, as Donovan sees it, is that the "PBGC has too broad of an interpretation of what constitutes a cessation of operations."
"A transaction may pose no threat whatsoever to a sponsor's pension plan, but it's perceived that way by the PBGC," explains Donovan.
