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CCH® PENSION AND BENEFITS — 5/25/07

PBGC mitigates risk exposure through Early Warning Program

In explaining the application of the PBGC Early Warning Program, Vince Snowbarger, PBGC interim director, noted that the Program is focused on financially troubled companies and significantly underfunded plans, but encouraged companies to provide advance notice of transactions that may raise PBGC concerns. Snowbarger was a luncheon speaker at the 2007 Great Lakes Benefits Conference on May 4, 2007, in Chicago. The conference was co-sponsored by the IRS and the American Society of Pension Professionals and Actuaries (ASPPA).

The purpose of the Early Warning Program is two-fold: (1) to determine a transaction’s effect on a company’s pension plan(s) and (2) to determine the level of risk to the pension plan and PBGC’s ability to recover in a default scenario. The PBGC first described the Early Warning Program in Technical Update 00-3, released July 24, 2000. The purpose of the update was to help plan sponsors and pension practitioners anticipate when the PBGC is likely to be concerned about a business transaction and explain the types of pension protections the PBGC may seek.

Screening criteria

The PBGC focuses on companies that are financially troubled or have a significantly underfunded pension plan. The PBGC will contact a company for further information about a transaction only if:

1. the company has a below-investment-grade bond rating and sponsors a pension plan with a current liability in excess of $25 million, or
2. the company (regardless of its bond rating) sponsors a pension plan that has a current liability in excess of $25 million and that plan has unfunded current liability in excess of $5 million.

According to Snowbarger, the PBGC encourages advance notice of transactions to minimize corporate disruptions. By contacting the PBGC in advance, companies can avoid any uncertainty about whether a transaction raises any PBGC concerns and minimize any disruption in corporate plans or actions. The PBGC will talk to any employer—the transaction does not have to meet the screening criteria above in order to get some input from the PBGC. In the Early Warning Program, the PBGC explains the criteria that are required to be met before it makes the first move.

Data used by PBGC

Frequently, the PBGC first learns of a transaction from reports in the financial press. Because limited information is reported in the press, the PBGC cannot always determine if the transaction is of concern without contacting a company for more information.

As part of its screening process, the PBGC will compute a plan’s unfunded current liability by taking the difference between the current value of plan assets as reported on the most recently filed Form 5500 (Annual Return/Report of Employee Benefit Plan), Schedule B (Actuarial Information) and the current liability as reported on the same Form 5500, Schedule B. The PBGC also uses the most recent bond ratings published by major rating agencies, which are readily available and easily understood by companies. In addition, the PBGC relies on information sharing among the Department of Labor, the Internal Revenue Service and the Securities and Exchange Commission.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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