PBGC Insurance Premiums

[Guest Frankie]

Does anyone know how the PBGC invests the annual insurance premiums received annually from employers until the funds are actually needed for use by the PBCG ?

[Mike Preston]

Why do you want to know? What possible difference can it make to anyone? I'm not trying to be flip, I'm trying to understand how the answer to the question can matter.

[JanetM]

You can go to PBGC web site and read the financial reports for some clue. Like Mike asked - why the interest?

[Guest Frankie]

Gee Mike, I guess we should all check with you before posting a thread to ensure that our questions are worthy.

While having a discussion regarding the current financial condition of the PBGC, the question of how the insurance premiums are invested came up. I reviewed my availale reference sources and have been unable to find the answer. Our discussion group was just curious as to the answer.

Let me ask you a question Mike....if the answer to a question that is of interest to some is of no interest to you, why would you bother to take the time to respond ? I'm not trying to be flip, I'm just curious.

[MGB]

The PBGC has two funds (single employer plan system and a separate fund for the multiemployer plan system). The premiums are commingled with the assets obtained from terminated plans.

Overall, about 75% is in government bonds. These are tradable bonds, they are not the special-issue bonds that the government uses for the OASDI and other trust funds that are mandated to invest in government securities. They change their asset mix depending on circumstances and most of the rest of the fund is invested in equities.

For more specifics, see page 30 and footnote 3 of the Annual report:

http://www.pbgc.gov/publications/annrpt/02annrpt.pdf

[Guest Frankie]

MGB-

Thanks for the reply. It's interesting to note from the PBGCs Annual Report that the single employer program net position in 2002 showed a deficit of $3.6 Billion. It's also interesting to note that the PBGC states in the report that their primary sources of cash come from insurance premium receipts and investment activities. The report goes on to mention that should funds from premiums and investments become insufficient to meet operational cash needs the PBGC has a credit line, made available thru the U.S. Treasurey, that may be drawn upon if needed in the future.

As a result of the large number of obligations that the PBGC currently has and knowing that many large defined benefit plans are in an underfunded situation, many arguably significantly underfunded, it would not be unreasonable to assume that the PBGC may need in the future to draw against its credit line in order to continue to meet its obligations.

With large Federal Budget Deficits looming, would not extending potentially large sums of cash to the PBGC have the potential to add significantly to the deficit?

I would think that most pensioners as well as many pension practitioners would have an interest in how well the PBGC is investing and managing plan assets and premiums under their control.....but maybe that's just me.

[Mike Preston]

Frankie, sorry to have offended you. Glad you got your answer.

[MGB]

Frankie,

I disagree with your analysis.

The PBGC was in a more serious deficit position from its inception to the mid-90s. It was only for a couple of years that it had a surplus, which it now no longer has (and there are very good economic arguments that they should never have a surplus). Its current deficit is very reasonable and managable.

Most of the large plans that are underfunded have no possibility of being taken over by the PBGC. Of course, there are some plans that the sponsors are not healthy. Remember, two things have to happen for the PBGC to take over a plan: the plan sponsor must be bankrupt without any possibility of recovery and the plan must be underfunded (it can even be somewhat underfunded and not cause a drain to the PBGC because not all benefits are guaranteed by them).

There is virtually no possibility that the PBGC will need to draw on their credit within the next 15 to 20 years, even if they take on the worst underfunded plans out there (primarily in the airlines, steel and auto industry). Remember, when they take over a plan, they also get their assets. The cash flow required to continue making payments for many years is well within their budget. Just because their assets are less than the PRESENT VALUE of the benefits they owe, that does not mean they are in any danger of not being able to pay benefits when due.

If they calculated the assets by adding a recievable of the present value of premiums they are to collect in the future, they would be doubly overfunded or more. Of course, offsetting that by the plans they may have to take over in the future puts them back in balance, and not necessarily underfunded.

Also, they did an excellent job at managing their money. While everyone else lost money last year, they gained investment income (about 2%) because they were primarily in bonds.

Their current deficit position is also highly driven by the low discount rates that they use to value their liabilities. If interest rates edge upward even slightly, they would no longer be in a deficit position.

One final point: If the government has to lend money to the PBGC to pay benefits, it would have absolutely no effect on the budget. The PBGC income and trust fund are part of the unified budget (premium income offsets the deficit and benefit payments increase the deficit). Borrowing from one hand and putting it in the other does not create a new debt of the government nor change any annual budget figures.

[AndyH]

What rate does the PBGC have to use to value THEIR liabilities on a present value basis?

[MGB]

The same statutory rates (select and ultimate) that they use to determine the liability of an employer when they turn over a plan to the PBGC. On 9/30 (the end of their fiscal year that the annual report is based on), this was 4.25% immediate, with 4% deferred. Currently, the immediate is down to 3.75%.