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CCH® PENSION — 12/09/11

PBGC's reported deficit doesn't justify premium increase: American Benefits Council

The PBGC's recent announcement of a record deficit does not justify an enormous premium increase or new powers for the agency, according to James A. Klein, president of the American Benefits Council.

In its annual report for fiscal year 2011, the PBGC reported a record $26 billion deficit, a $3 billion increase from the $23 billion reported last year. However, according to Klein, "flaws in the way PBGC's financial condition is reported makes the situation appear far worse than reality."

Klein contended that the reported deficit "is simply not correct and - even if it were correct - would not be a justification for raising premiums or for giving PBGC authority to set premiums in the future."

Calculation is flawed, Council says

According to Klein, nearly 80% of the PBGC's reported deficit is directly attributable to the current historically low interest rates. Low interest rates translate into a calculation of higher pension liabilities, Klein noted. Therefore, he said, "when interest rates rise in the future, that artificially created deficit will shrink, if not evaporate."

Klein added that much, if not all, of the remaining 20% of the deficit results from the PBGC using an interest rate that is "materially lower than the rates employer-sponsored plans are required to use by the Financial Accounting Standards Board (FASB) and pursuant to the Pension Protection Act of 2006." An overstated deficit can be used to justify the PBGC's request for Congress to approve billions of dollars in additional premiums and to give the agency unilateral authority to set its own premiums in the future, Klein said. By contrast, he added, it is not in employers' interest to understate the deficit since they - not the public - face the prospects of higher premiums when other companies impose liabilities on the PBGC.

"Whether one believes the accuracy of the PBGC's self-reported deficit or the concerns of those of us who challenge it, no one can claim the current federal budget deficit is the result of employers who today sponsor pension plans not paying promised benefits. Thus, there is no justification to raise their premiums to help close the deficit," Klein concluded.

Source: American Benefits Council news release, November 15, 2011.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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