Private Pensions:

Funding Rule Change Needed to Reduce PBGC's Multibillion Dollar Exposure

HEHS-95-5: Published: Oct 5, 1994. Publicly Released: Oct 5, 1994.

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Pursuant to a congressional request, GAO reviewed the underfunding problems of the Pension Benefit Guaranty Corporation (PBGC), focusing on the: (1) efficacy of Pension Protection Act (PPA) provisions in reducing underfunding; and (2) potential impact of the proposed Pension Funding Improvement Act (PFIA) of 1993 and Retirement Protection Act (RPA) of 1993 on improving plan funding.

GAO found that: (1) the current funding rules for underfunded plans are not effectively reducing underfunding problems; (2) sponsors of most underfunded plans make no additional contributions to reduce underfunding; (3) although PPA requires sponsors of all underfunded plans to calculate an additional contribution amount, it also allows this contribution to be reduced or offset; (4) because many plan sponsors contribute less than the amount originally calculated for their underfunded plans, few underfunded plans advance toward full funding; (5) the current funding offset is too large for many underfunded plans; (6) although PFIA would reduce the percent of sponsors making increased contributions to their underfunded plans, it would cause substantial increases for the few sponsors affected by its solvency maintenance provision; (7) RPA would increase the percentage of underfunded plan sponsors making additional contributions to about 50 percent; (8) about half the sponsors of underfunded plans will not make additional contributions if RPA is enacted without any further changes; and (9) changes to current funding rules beyond those proposed in RPA should be considered to protect PBGC and plan participants from the consequences of underfunded plan terminations.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress passed the recommended legislation as part of the General Agreement on Tariffs and Trade.

    Matter: In view of the persistent and growing underfunding in pension plans insured by PBGC, Congress should consider redesigning funding standards to bolster contributions for underfunded plans. Many provisions in RPA, such as the solvency rule, the offset redesign, and the immediate recognition of benefit increases, should be included in any new legislation.

  2. Status: Closed - Implemented

    Comments: The recommendation suggested a method that would require all sponsors to make additional contributions to their underfunded plans. Congress considered this, but decided that not all underfunded plans required additional contributions. Unless the new funding rules Congress imposed on sponsors of underfunded plans are evaluated and found insufficiently strong, this recommendation is no longer needed and should be closed.

    Matter: Congress may wish to consider limiting the amount of offset that can be used to reduce the additional contribution, thus increasing the percentage of underfunded plans receiving such contributions. If this offset were limited to 80 percent of the initially calculated additional contribution, for example, then sponsors of each underfunded plan would make a contribution in addition to the minimum contribution required under the Employee Retirement Income Security Act of at least 20 percent of the initially calculated additional contribution amount. If Congress wants to exempt almost fully funded plans from this automatic funding requirement, it should consider applying the requirement only to plans with funding ratios below a specified threshold. These changes would have to be made in accordance with the budget's pay-as-you-go-requirements.

 

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