Tsbl_ 4 Wh How at W isall PgC Fund C'sad Curr At_ 8n!D_ Finan fln_l cial g_ngt _fa ittus? P6 Table nsiont Plans? p p ue e r_ mlo ndon lgrfu _tiv r ben _ie _.eTh fit rgtio _, e s .The o ex cip a_r d lin e_, ie _r,ur ign _ed cr an _ e _at ra pe ets rspectiv efin of a ret ne u i,_ re n vi .lin of eTable c w en 1C._ sPB tiv_ e_ GO r_ for eas nt unde aov transfe e sr ir_ able holding ragency sponsor p;n eriod b aesoc hav from ial ior insu tand _7C rance allows to 4_0, allegations _&L have ยข were surf given acednew regarding inveslp men! ension powers plans, ;nthis t_)8 only 0,and concerns manymarg the exposu inallycarp eiof tala izpo edten inst |iial tut cla ions im discussion ,_ balance of PB(3C between solvency social . Acco _iUBMI nsurance rding _ION to an PB( d3C casually Off , currDALLA en insurance t premi _ um _ALI pri re nc c _ ei iBURV, ples pts _is tot mal ost $790 likely mto illio achieve n per year, an EBRI Table 3 Rates of Return on Common Stock for New York Chart Stoc 2 k Exchange (NYSE) and American Single-Employer Fund Assets, Benefit Liabilities, and Net Deficits Surveyed Flrms' Funded Ratlos, by Percentage of All Surveyed Penslon Plans, 1981-1991 PAUL YAKOBOSKI, AND, CELIA SILVERMAN Chart 1 L. i Stock Exchange (AMEX) Firms Sponsoring Underfunded Plans In 1990 Funding Ratios of Single Employer Defined Benefit Plans, 1977-987 EMPLOYEE BENEFIT RESEARCH INSTITUTE Mortgage Asset Distribution of FSLIC-InsuredSavingsInstitutions(as of December 31, 1988) the w arrangement, believed hile op th po ertunity th ree turn ywhile could for onunder equi the grow casualty ty fth unding ofeth ire way insuranc mo ofout d steu fined o nd fth e epe rt e ben u ir rs nded problems. pe efit ctiv p pl ea e nsion maintains nsw The as plans. 0. rapid 6that pe Unl growth rc PBGC en ess t. these o Tshould fhag e v ea flaws ncy-guarant lue function weig areht corr like ed ee in ed acted, dexfor overall while anddo inter e strong Co snot encern st deal and and has dividend with continuing be the enmore voi rec defined ced eipts important reg currently ar benefit ding issue P approximate pension BG ofC' whether sfisystem. nanci $3 a al 0 c5 viabi laim Too million li will tsubstantial y.arise S pe uch r year. in conc the a moveme Future e first m ari pla ses income c ntefr (i.e., toward omis will Pdifficult Beither GC' thes PBGC's abilityto meet itsfutureobligationsis alsodependenton the healthof the privatedefined AssetDistributionin PrivateTrusteed PensionPlans, 1991 Rat Loans io of-53.8% Year Total Assets Present Value of Accumulated FOR THE SUBCOMMITTEE ON OVERSIGHT Accrued Benefits \ Year Future Funding Benefits Ratio HoldingPeriod DeficitT-85 COMMITTEE ON WAYS AND MEANS traditional commercialinsurer. plan sponsorenter intobankruptcy). s liabilities PBGC tockstmay rad does ev deon ry not w the e appear llNY continu SE toand be erunning the AME case Xdeficits wa with s 14 PB .into 3 G perc C. the en In for tfove act, eserthe eable theOmnibus sa future; me perio pure Budget d(casualty tabReconciliation le 4). insurance Act of to extre net predict; worth me co deficit premium uld ultimately of $2 income .5 billion lead dep in many end itsssingle-employer businesses on the sizeto and abandon fund funding and the status the defined estimated of the bede nefit $31 fined approach. billion benefin it unde system Should rfunding as that well benefitsystemas a whole. PBGC reportsthat, inthe aggregate,definedbenefitplanshave $1.3 trillionin Equity-50.0% 1986-1990 1981-1990 1976-1990 over Assets 1981 1982 U.S.1983 HOUSE 1984OF 1985 REPRESENTATIVES 1986 1987 1988 1989 1990 1991 ($ millions) 1977 85.0% \ 1991 StandardizedUnderfunding $ 5,664 QuintileRanking a $ 7,845 $ 2,510 T Even he market's if attention relative is fop cused erception on the ofthe exposure financial issue, health one offi firms nds a traded tremendous on AMEX differen andNYSE cein two that advocates 1987 introduced believe athat potentially the program chilling should effect ideally on the have future ass growth etsat o least f uninsur equale to dben liabilities efitsby . requiringthat if be within as th dee e individual m regulations The ed desirable, social pension governing insurance it should plans, premium pe come $13 rspective billi from rates, onis o explicit th f which while e foundation targeted inv is c eonsidered stme o actions, nt f Title earnings by IVnot PBGC of as ERISA. depend the to pose ind on This ire the a ctpe "serious effect net rspfe low ct ofrisk" ive well ofrelies assets on assetsto back $900 billioninbenefitliabilities. 1978 Availableevidence 84.2 suggeststhat approximately 85 199 0 Least .00-0.49 0 Underfunded 17% 3,111 8% 6% 4% 3% 4,7908.55% 2% 3% 12.29% 2% 1,913 3% 16.2% 16% 1% Wednesday, August 26, 1992 1979 91.0 0 2.50--0.74 17 13 13 8 6 8.83 5 3 13.41 4 4 14.57 2 4 1989 3,059 3,984 1,124 intentioned reforms. because regards. had eachund period Four e of First, rfunded sponsor as major well the plans thrift pro as financial the po in industry sals 199 ratetroubl hav 0ois freg return e declining be e ulation . en eintroduced arn was over ed. 1980 decentralized; tim To g e to e . tTh change some e common idea pensions PBGC's 107.0 ofstock the curr are funds oe not. f nt each operation. involved, Se quintile cond,consider the While of matter thaof t the app a plan eals adopts to justice an am and endment collective that reincr sponsibility easescurre .The nte liability xistence and ofthe pension funded plans curre was nt liabili heldto typserv ercentag ea eof percent 3 0.75-0 of.pe 99nsionplans 21have assets 24 equal 17 to or 15 exceeding 13 100 7.06 14 percent 10 of liabilities, 10.8 11 1 up11 from14 45.9 11 percent 8 10 1988 2,422 3,806 1,543 1981 106.9 4 -0.91 4.34 10.63 1.00-1.24 23 26 25 20 21 17 16 16 18 20 25 1987 2,163 3,629 1,549 1982 115.4 und maintaining regulatory e Most rfunded Underfunded forb PBGC's plans earae nc social xe pe has rien insura often cedabeen nc lower eprogram, cit rate ed as ofthese adding return proposals net to the of-the 13.85 eve re value nt pual rescost w ent eight aof further e the -4 d.index 24 S&L mov for bailout. ement NYSE toward 0.59 In and the legitimate present p 1.25-1 lanThe valu is public .49 less e $2 o.f5 than receiving int billion erest, 60 11 deficit percent and $790 therefore does 12 million inthe notyear each it 18 imply argu in year that e which s 21 for for PBGC insuring t the he19 am next has e of ndment 20 inadequate all 21 years reasonabl takes (valu 20 assets e eff d ebene ect, with to 20 the fcover a its dis co that ntri co 19 payment unt abu spo ting rate nsor 20 s opo f 6.25 is nsor 22 in 1981, 1986and38 percent have 1,740 assetsinexcessof 150 perce 5,492 ntof liabilityfor accrued benefits 3,826 (table2).7 :::::::::::::::::::::::::::::::::::::::::: Sincethe enactmentof the Employee Retirement Income Security Act (ERISA) in 1974, Bonds-22.2_/ 1983 124.7 1.50 or more 11 17 21 32 38 41 48 47 45 45 38 1985 1,155 2,447 1,325 1984 128.8 / 1984 ValueWeightedIndexfor 1,0 NYSE, 63 AMEX 1,497 11.75% 13.01% 462 14.25% willing c AMEX casua omparison, lt to iy f th insura provide e stock the nc re for e was c conc ent itspurchased employees ae cpts. tionThey of shutting later. aapproach nd honori Th down e com th ng the ethe mo be pension n n nature e stock fitguarantee o of plan f the defined for thre and Pan e be quintiles p Am n lan efit reveals termination plans, of plans no i.e.,such with realizing issues hesitation the of smallest that the perc obligations ande memb nt4) is e due $8.9 rsoin fthe billion. theco immediate ntrolled Such rgroup efuture. ceipts must are When likely provide a plan to b security eterminates, availabl (e.g., e toPBGC a help bond) cover inherits to the future an plan. obligation pension liability to make a The percentageof plansthat werefullyfunded on a terminationbasisincreasedevery year between 1981 employer-sponsored Miscellaneous pension plans have assumed 1985 an increasingly 136.3 important role in providing retirement No. 1983of Plans 575 1,0 813 85 700 919 846 1,570 799 720 786 787 523 781 801 1986 132.4 Assets-10.9% Statement 1982 Excess 773 Rateof ReturnRelativeto 1,076 NYSE, AMEX Index 333 benefitincreasescreateunfundedliabilities to befunded inthe future. Social insurersmaintainthat the on and the 1987 part aof ndthe leveled current offPBGC between dec1987 isionand makers. 1991. defin underfunding edbenefit ratios insurance experienced systemfrom positive mere net orates f a casualty of return insura for the ncepr holding ogram pe pe riod rspe from ctive 1976 byaiming to 1990. to stream payments of Best payments from judgments today's to terminated plan areretirees thatfraud plans over and and a peried mismanag also to ofcover years eme payments into ntexisted the future fin ora obligations bo (20, ut 40, 60 percent even that more may of the arise than S&L in 60the 1987 128.6 income security. The Pension Benefit Guaranty Corporation (PBGC) was created under ERISA to Source: The Wyatt Company, Survey of Actuarial Assumptions and Funding: Detailed Survey LeastUnderfunded -3.20% -0.72% 1.91% Results : Pension Plans with 1,000or More Active Participants, 1989, 1990, and 1991 minimize However, future (thePBGC the pote nntial e 's t exposu rat $13 eof billion return rethrough in onun common ifnc und re ed asin b stock e gne recove fits experienced discuss riesand edminimizi by above these and ng thr cla /or ee ims other quintiles . Howev future ofer, plan liabilities thesponsors propos thatals fsystem years) ailures as was and Perhaps opposed d that esign th the e to e yd mo co one tontribut st involve large impoe rtant lump-sum d cross-subsidization to th distin e failure payment ction or beinsolv twon of een termination. plans e the ncytw o when fo th programs e nec S&L The ein ssary present perhaps is that to protect value funds aboof ut are participants these 25not percent generally futureo . f From1977 to 1987, the fundingstatusof single-employerdefinedbenefitplans significantly Source: U.S. Departmentof Labor, Pensionand Welfare BenefitsAdministration, Trends in 2 -2.92 0.40 0.32 strengthen Source:retirement Pension Be security nefit Gby uaranty guaranteeing Corporation benefits , Pensifor on employer-sponsored Benefit Guaranty Corpor defined ation benefit Annual (Washington, DC: The Wyatt Company, 1989, 1990, and 1991)o ::::::::::::::::::::::::::::::::::: Before the Subcommittee on Oversight 3 Pensions, John A. Turner and Daniel J. Belier, eds. (Washington, -4.69 DC: U.S. -2.20 Department of0.73 Labor, Report 1991: Strengthening the Pension Saftey Net (Washington, DC:;,:.:Pension .:._.:.:.:.:.:.:.:.:.:.:.:.:.:.:. Benefit Guaranty Note: Data Mutua are l Fubased nds-4.8on % a survey of pension plans covering 1,000 or more active decreasedto negativevaluesforthe holdingperiodfrom 1986 to 1990. The net rate of returnon maintain the cases. a so Evid cialeinsurance nceof such program's activityamong objectives singby le-employer attempting pension to alterplans the beis havior almost of t nonexistent he participating . may payments, available improved, arise Some to .)rising currently the Consideration argue cfrom ustomer $7.8 that an billion, average the on ofd social futur ema ise of booked nd insurance income 85 inpercent a defined today rec aspects efu ipts as nd ba ein ed nefit liability. o addition to f PBGC's pension 129However, per to finsuranc c uture plan entfunded prior it liabilities isesystem not toon anecessary termination provides a termination are responsible for additional . PBGC Although basis for to its 1989). 4 Corporation, 1992). Committee on Ways -12.66 and Means -8.67 -3.62 pension plan participants. Under ERISA, PBGC has three principal missions: to encourage the employees.The 1990 survey contained single-employer plans (90 percent) and multiemployer MostUnderfunded -25.60 -17.25 -13.66 plans (10 percent). U.S. House of Representatives Insured Mortgages/ commonstockforthe two quintilesof planswiththe largestunderfunding ratioswas negative \ ineach insight plans there netdeficit. and isinto some Ano plan However, PB ther po G sponsors C's probl tential solvency. from efor m while that lump-sum thearose Mon social maintaining eyin insura distdbutions theJS& cross ncL ep se _e subsidies to ct rsp or negatively e that ctive, has aPBGC's ndno ith mpa e co \present ct mp net aarable pension defpremium iciteis quival plan not structure. a 's emeasur c nt ash inthe flow, e PBG The ofthis C (table have assets 3). Sin adequate ce 1980,to defined cover these benefit liabilities plans,on now average, because have payments been overfunded. are not currently The in due crease . A deficit in continuation and maintenance of voluntary private pension plans for the benefit of their participants,1 to Markets-1.8% Mortgages-2.0% Cash-8.3% Source: PaulYakoboski,Celia Silverman,and Jack VanDerhei. "PBGC Solvency: Balancing Other-21.7% Cash& Govt. / _ Other Mortgage-backed on Securities-4.2% Loans-4.4% Securities-15.8% proposalswere includedin PresidentBush's1993 budget. p holding exposure does could erfSocial ormance not be pe O c necessarily n base ontrolled riod and aor p.ur Casualty is a The e bi that ca lity (at s n indicate h o to eleast t fflo loan rate Insuran me w theoretically) e ba o tdanger participation. obligations fsr is e cturn e PBG Perspe of on Cimminent common a by but ctu cAs tives." ERISA al rather lS& y ran insolvency, L stock E s section an BRI fa ou s ind urplu nd o Issue fication plan themselves 4045, sbut in Brief sponsors 199 it of which does whether no. 1 aco s 126 allows indicate nstrained in rec the the (Employee eip PBGC fts premiums ourth that from by assets to quintile limits oBenefit perati rec aapture re on must nreach sufficient gtha ect part ie vd itia of es or fundingratiosmostlikelyreflectsa combination of factors, includinghighercontributionratesneededto provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries ResearchInstitute,May 1992). Source: Federal Reserve Board, Flow of Funds Accounts, Financial Assets and Liabilities, Fourth The Finandal Condition of the claimsare unusuallyhigh. BecausePBGC is a governmentagency, itsnetdeficitis inconsequential to its eventually exc any amount lowe o aUnderfunding distributions eded f -12.7 they disbursem be per co inuld c ce that reased nt, lend measured estart a nts nd to to the fwithin rom a meet single rate by ope the future FASB o rating bo f three return rrower, obligations '87 ayear ct on dis ivities. they co cperiod losures mthat b mo Premium egan n immediately are stock for tou known sell nd o re ferfunded ceipts o plan fftoday. pre pieces so po cfeding plans $786 nsors of the the in million in1990. loan plan the fifth to plus 'sfailure Standardized other quintile interinstitutions. .eCertainly, stre and ached meet Sou minimum rce: EBRI fund compilation ing standards, from favorable United Sinvestment tates Leaguereturns of Savings on equity, Instituand tions, theSavings use of I higher nstitutions interest under covered plans, and to maintain premiums at the lowest level consistent with carrying out its Quarter 1991, (Washington, DC: Federal Reserve Board, 1992). underfundingis equalto the accumulatedbenefitobligation,orterminationliability,lessthe Sourcebook, (Washington, DC: United States League of Savings Institutions, 1989). Pension Benefit Guaranty Corporation Conclusion marketvalueof assetsdividedbythe marketvalue of the sponsor'scommon stockin 1990. a there ability lowis of toonly -25.6 meet limited its percent obligations eviden for the cwh eholdi ofec natastrophi due ngperiod . A more c from "rurelevant ns 1986 on the to me bank 1990. asure "from is its the cash stand flow, po whi intof chdefined is positive. benefit Un rate dividends foassumptions rtunately, Ino addition, f $305 many to million PBGC dis of these co resu unt is likely se future lted cond in to be $1.1 in ary c nefits. ur lend billion liabilities ers in relied total not on shown receipts. the underwriting on current Operating financial capacities activity statements disbursements of the originating resulting totaled obligations. aThe Department of Labor published asset allocation of single-employer defined benefit plans by with 100 or more participants based on 1987 5500 forms. Asset allocation in 1987 was: equity, plan sponsorsor PBGC. Furthermore, Doesthe a gene creators raltaxpaye of ERISA rbailout recognized reminiscent the po ofssibility the FSLIC of systematic episodeloom abuse on PBGC's andthere ho fore rizon? required from S& $66L 0.future million Although distress andawere larg terminations. e com propo posed rtion primarily PBGC of defined keeps of be bene n track effit itplan payments of undeffunded assets atare $514 placed plans million, where in bank administrative it pooled considers funds expenses distress and at Despitethe soundaggregatefunding statusof the defined benefitsystem,the netdeficitof the While PBGC has always operated with a net deficit, large plan terminations infiscal 1991 and 1992 22.9 percent; bonds, 16.7 percent; cash, 11.3 percent; real estate, 0.8%, unallocated insurance contracts, 22.4 percent; pooled funds, 20.4 percent; and other, 5.5 percent. (U.S. Department of Is It Valid to Compare PBGC Dallas and L.Savings Salisbury,andPaul Loan Yakoboski, Problems?and The thatrp eea nsion re cuplans rrently me suf efticient minimum liquid co assets ntribution within requirements, the aggregate ordefined minimum benefit funding system standards. itselfto However, coverthe terminations $63 similar single million, -inv emp Moreover, estments lo and to yer be int insuran e a awh rft reasonable eer st er a pu c ee termination, there rchased system is poa can ss at sharing ibility, $8 the be 1 c significantly million. ash o but f investment flow it does This poisition nc rnot esu reased results, include ltof edthe in by a this tw the single net o strat programs net cash o underfunding e cc gy flow urren isis fundamentally su markedly c rp es lus of in fdistress rom these different. operating different plans on have increased its net deficit to $2.5 billion as of year-end 1991. (Table 1 reports the historical trend in Labor, Pension and Welfare Benefits Administration, Trends in Pensions, John A. Turner and Celia Silverman Daniel J. Beller, eds. Washington, DC: U.S. Department of Labor, 1992). current S&L existing depositors financial po Given ckets the are statements ofmanner unde typicrf ally unding in as paid whi it does c within immediately, hthe with federal individual probable while government's plans. PBGC terminations. The spreads guarantees refo2 re, out PBGC unless pay tocurrently me pension legislative ntsover participants estimates changes a longpe that a ri hav rod ethere m of eade activities even fromlwith oano p the fart $431 itight cipa million tion ening stha of in t1 minimum ha 991. ve bee PBGC fundi nchar anticipates ng acteriz stand eards, dpo as sitive "it ais trans st cash illfpossible er flows of risagain kto frominimize min a 1992 partycontributions w and hodoes lacksnot courage within to terminationsof largepensionplans. Underfundedplanssponsoredbycompaniesthat are having assets, liabilities for future benefits, and net deficit of the single-employer fund.) PBGC's increasing deficit Employee Benefit Research Institute time. one who lacks knowledge.,,8 that legal been cause guidelines, implemented, employers causing it is tonot te further rmi surprisi nate plan well ngthat underfunding. fund PBGC ed defis ined inevitably benefitcplans ompared en m with asse, other thus in denying centive-PBGC incompatible a fexists oresee$13 any billion near te ofrm underfunding problems in in meeting the single-employer its obligations. defined According benefit to PB system GC, that "Although posescash- a reasonably flow financialdifficultiesrepresentthe greatestriskto PBGC. The stockmarket'sassessmentof plan sponsors' has caused some to question its ability to continue insuring pension benefits in the long term. PBGC base of pr On Although em the ium other pmost aye ha rs, of nd a the ,gene the dis casualty ral cussion taxpay insura above er bailou nc dealt epe two with rsp uld ethe be ctive u similarities nnece would sargue sary (or . that lackth thereof) ere is no beoverriding tweenthe guarantee could possible turn From risk negative futo nd 1981 the s, inc corporation. as to luding 1987, earlythe as S&Ls three now This insured defun years is notcin a by tFederal liability the FSLIC pessimistic from Savings werepast permitted forecast, and terminations Loan to 5 th Insuran use e for und accounting probable c has eCorporation ample terminations options assets (FSLIC). that towere but pay financialhealthcan be measuredbyexaminingtheirequityrates. An analysisof ratesof returnon believes that incorporating traditional casualty insurance principles into the current insurance scheme Washington, D.C. its liabilities (benefit payments) for a considerable period of time."_ public exposures not However, in agreement interest Does several of S&Ls this in having with mean im and port generally that PBGC, d ant efined there distinctions the accepted be are ne mo fno it stpensions. should problems important accounting be drawn. with differen Th principles ere the fore, c PBGC ebetween insurance (GAAP) insurance the and should tw have system o guarantee not been b and e described provided therefore fundsis for as that no rather a potential liability for terminations PBGC believes may happen in the future. common stockof New York Stock Exchange(NYSE) and AmericanStockExchange(AMEX) firmswith would minimize its exposure and reduce incentives inherent in the current system for sponsors to transfer b the changes enefits likelihood As that are ofincrease needed? that the e and plan of PBGC's No, insured 1988, both ex FSLIC social by poPBGC sure, -insured insurance such willfail savi asand benefit is ng dive s casualty institutions rs inc ified reases a insurance cross were inseveral already mu proponents chkey mo unde re indust rf co und acknowledge ncentrated ri ees, dplans whereas in and that S&L "self-deceptive On the accounting other side of procedures" the ledger, PBGC by the will executive be receiving director revenue of PBGC. in the Infuture contrast, from pension premiums plans and underfundedplansrevealsthat companieshavingthe largestunderfunding relativeto the marketvalue of 26 August 1992 pension debt to PBGC. Some argue that unless the system is altered, PBGC's deficit could ultimately lead b guarantee the se ec nurities system efitsconting sensitive funds needs e were nt toto on change downturns ex unpredictable posed in order ex in clu the to e siv vely real reduce ents to estate (plant the abuse risks market shutdowns, and of athan maintain single for defined industry example) participants' benefit that that was pension retirement are extremely typically plans security are vulnerable nottoday . investment must adhere earnings. to very conservative While such re acccounting eipts may m not easures resultunder in adequate FAS 35, assets whileto the cover vastall majority PBGCof liabilities the large for theircommon stockalsoexperiencedthe lowest ratesof returnon equity. Equityratesof returnare 3pBGC's premiumswere raisedmostrecentlyin 1991. Theflat rate wasincreasedfrom $16 to $19 perplan to a general taxpayer bailout reminiscent of the Federal Savings and Loan Insurance Corporation (FSLIC) participant,andthe overallcap on premiumsfor underfundedplanswas increasedto $72 from $50. Itcan be argued (cha to pre fraud fu rtnd s 1 ed. As and and cCasua urrently events 2). In ltfa y beyo structured, insura ct,defined nd its nce cpro the ontrol. benefit po pension nents pension al insurance so plan argue assets system that premiums are creates invested shou a financial inld a variety be structur incentive of investments, ed for sothat employers plans plan unfunded that this sponsors latpension est incr follow eas benefits, eGAAP has not procedures, they been are inenonetheless ffect atlong least enough for likely those toto hav events be e had significant a defining noticabl and their eeshould ffesolvency cton th be e d inand ecfluded icit, net soworth in that any shownover three holdingperiods for common stockspurchasedin the beginningof 1986, 1981, and episode. Proponents of a social insurance perspective, represented by ERISA, argue that worker thingsmay improvewiththe passageof time. determinations. 4In to whi pounderfund sing th ch emeans 1991 the greate PBGC their thatst even annual defined riskif pay rPBGC ebenefit po corres rt,th ce ash plans pr po eflow ndingly se . nt The valu problems higher vast e of fmajority utur premiums, deteriorated eben of efits sponsors without is to valu the ed point limit. maintain at 6.75 where pe well rcent there funded forwas imm plans e adiat need e to 1976 andheld throughthe end of 1990. Plan sponsorswere rankedintoquintilesbytheir standardized annuities,and withlowerratesfor deferredannuities,givinga compositerateof 6.25 percentthat was alsousedfor 2Aprobableterminationis onethat PBGCconsidershighlylikelyto occur;thisjudgmentisbasedon criteriagivenin projected investmentresults. sell despite Social off athis After Th Insurance large eincentive, casua deregulation, perclt entage yinsura Perspective but of some S&Ls nc the epdefined do turned ersp not. versus ective to benefit Without areas argues Casualty plans' in changes, that which assets, the Insurance they PBGC underfunding had there insurance little would Perspective expe within be rscheme tise less the (commercial need defined is flawed for realizing benefit real inits estate). u FA nd Serfundi BStatem ng en on No. t a ter 5_mi Acco nation untbasis. ing forCon The ting common enciesTh .sto ec pla kof ns the invo quintile lved hav of en plans ot beg with unthe the termin smallest ation process, butratherthesponsor isinsuchdirefinancial straits thatPBGCconsiders thetermination likely,although not 5pBGC developedthree 10-yearforecastsof its expectedstatusunderdifferentloss scenarios. The pessimistic The views expressed in this statement are solely those of the author and should not be attributed to the necessarily imminent.PBGCbooks thenetliability fortheseprobable terminations oncurrent financialstatements depressedassetvaluesthroughliquidation than inthe case of S&L insurance. system design It has been and is The likely that alleged urgen to these improve cy that su flaws rr auditors ou only are nding slowly the did PB cause not GC if historical properly 'so curren f anyttrends supervise existing financcial ontinue. deficit co the ndi industry. probl tion Were and ems. more Although wh The at, firms isystem f any, similar to begin ch is anges no types to t dtake e are of signedon scenarioassumesthat terminationof the planswiththe $13 billionof underfundingthat pose a reasonablypossible Employee Benefit Research Institute, its officers, trustees, sponsors, or other staff. The Employee Benefit because theseareobligations forwhichtheyarelikely to be responsiblin e thefuture,andthustheywantto 7Throughout 1-While ERISA this refer discussion sto"volu*nt ter ary m pri ination vatepensio basis"refers n plans to ,"basing theHous funding eCom ratios mittee on onbenefits Educatia occ n an rued dLabo andrassets initsSingle- riskoccursoverthe next 10 years inadditionto a modestnumberof lesserterminationseach year. recogniz Resear e th chem Institute now.Som is aenonp actually rofit, mov nonpa eorff tisan, theprobabl public e list policy and reoth search ersre ormain ganization. onitforyears.Thereported claims a Em ccu ployer mulated Pension atthePlan endof Amendm theplane year, nts Act th Com eassu mittee mpt Rio eport ns plans cites would the"original useto cpur alculate poseliabil of " the itties itle for as standard "toencourage advantage sou necessary ndinsuranc depends of theepri system, on nciples, whether the alt financial hough the corporation itpicture is supposed could is viewed to deteriorate. befrom an insurance a social insurance systemprot or a ecting casualty participants' insurance 6See Pension BenefitGuarantyCorporation, Pension Benefit Guaranty Corporation Annual Report: Strengthening figureis netbecause it isthepresent valueoffuturebenefitsforwhichPBGCisliablelessestimated planassets terminations. theestablishment Term and inat maintenan ion basisfunding cof e defined doesnot benefit refer plans to PBGC's whilecalculation providing for of the liabil sec itur ies for ity of underfunded promised pension the ben Pension efits." Saftey Net, 1991 (Washington, DC: Pension Benefit Guaranty Corporation, 1992). 8j ava effrey ilablKo e aneppel, drecov "The erie Ins from s olve en mploy cy Look ers. ingGlass,"Best'sReview(September1991):37ff. terminations, usingtermination mortality andretirement ageassumptions. EMPLOYEE BENEFIT RESEARCH INSTITUTE 3 4 5 6 8 7 6 2 9 5 3 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 4 10 2 Telephone 202-659-0670 FAX 202-775-6312