PBGC Deficit Is Real

American Academy of Actuaries finds the assumptions underpinning PBGC liability calculations are reasonable.

Last week, the American Academy of Actuaries released the results of a study on the funding deficit for the single-employer pension program of the Pension Benefit Guaranty Corporation (PBGC). The PBGC, which protects pension plan participants in the event of a plan sponsor’s failure, is funded by the premiums plan sponsors pay. The organization reported a deficit of $29.1 billion for the fiscal year ended September 30, 2012. (The multi-employer program reported an additional deficit of $5.2 billion, which was not considered in the American Academy of Actuaries study.)

The single-employer program's deficit is the difference between its assets and liabilities; the liabilities consist primarily of the present value of pension benefits that the PBGC owes participants in defined-benefit plans it has taken over. Some critics have argued that the interest rate assumptions the PBGC uses in calculating these benefits are more conservative than the assumptions most corporate plans use. They point out that the PBGC has incentive to overstate its liabilities as it seeks better funding. However, the American Academy of Actuaries study found that "the PBGC's methods and assumptions produce a reasonable representation of its current obligation and deficit."

According to the study, PBGC's current assets are sufficient to pay benefits for many years, so despite the funding deficit, the organization is not currently in crisis. However, even if interest rate assumptions were changed significantly, the PBGC would still be running a deficit. Ultimately, the study urges, "priority should be placed on developing a premium structure that reflects the risk that plans pose to the system with respect to future terminations."

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