2011 Pension Crisis Looming

America's defined benefit pension system is in dire straits, and the federal agency of last resort has issued a forecast for fiscal year 2011 showing more trouble may be ahead. When the U.S. Senate Health, Education, Labor and Pensions Committee held a hearing Dec. 1 about management of the Pension Benefit Guaranty Corporation, the pension agency's inspector general testified that its board and staff are successfully addressing many of the recommendations issued by her office in recent years. But Joshua Gotbaum, PBGC's director, testified that potential liabilities for the agency are rising, with a $20 billion "reasonably possible" exposure in multiemployer plans developing this year. In 2009, that exposure was only $326 million, he said.

"Reasonably possible" represents plans that are reasonably possible of requiring future financial assistance; the dramatic increase results from just two companies, one a "transportation, communications, and utilities" company with a net liability of $15 billion in its plan, and the other an "agriculture, mining, and construction" company with $4.8 billion of net liability, Gotbaum said.

Single-employer exposure in FY2010 stood at about $170 billion, up slightly from $168 billion in FY2009. As of Sept. 30, 2010, PBGC's investment portfolio totaled $66.8 billion, he said.

The single-employer program protects about 34 million workers, retirees, and beneficiaries in about 26,000 plans. The multiemployer program protects more than 10 million in about 1,500 plans.

Gotbaum was appointed to his position by President Obama in July 2010; the Dec. 1 hearing was his first oversight hearing as PBGC director. He is an investment banker who was Chapter 11 trustee in 2003-2005 for the reorganization of Hawaiian Airlines, according to PBGC. Gotbaum told the committee that PBGC did very well with its portfolio in FY2010, realizing a 12.1 percent annualized return on total invested funds. He said the agency expects to pay $6.7 billion to about 800,000 retirees and beneficiaries in FY2011 and to have an investment portfolio above $76 billion. "We can and will pay benefits for the foreseeable future. However," he added, "over the long term our liabilities exceed our assets."

HELP Committee Chairman Tom Harkin, D-Iowa, opened the hearing with a statement warning that PBGC's future is at risk. "PBGC's deficit rose again this year, hitting $23 billion, and the agency is still grappling with the fallout from the recession," Harkin said. "Moreover, PBGC's annual report indicates that there is a very real chance that some very large plans could become insolvent in the near future. That would increase PBGC's deficit tenfold and pose a significant administrative burden. In fact, the Inspector General just recently released a report that raises serious concerns about whether PBGC would be able to cope with a sudden influx of pensions brought on by a new economic crisis."

"It is high time that we take a good look at best practices and see if there are some common-sense improvements that can be made to modernize PBGC," Harkin said. "Senator [Herb] Kohl has already put some ideas on the table, and I commend him for that. This is a matter on which I hope we can put aside partisanship and work collaboratively to improve PBGC and strengthen America's pension system."

Posted by Jerry Laws on Dec 06, 2010