Pension Plans:

Government Insurance Program Threatened by Its Growing Deficit

HRD-87-42: Published: Mar 19, 1987. Publicly Released: Apr 30, 1987.

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Pursuant to a congressional request, GAO assessed the: (1) causes of large claims against the Pension Benefit Guaranty Corporation's (PBGC) insurance program; and (2) potential effects of the Single Employer Pension Plan Amendments Act (SEPPAA).

GAO found that: (1) 90 percent of the $501 million in claims against PBGC from 1983 through 1985 resulted from 23 employers terminating 33 pension plans; (2) even if those employers had made all of the required contributions to their plans, the 33 plans would still have been underfunded by $317 million; (3) benefit increases before termination contributed to underfunding of 27 of the 33 plans; (4) the 23 employers made only about half of the required contributions in the 5 years before they terminated their plans; and (5) the Internal Revenue Service (IRS) waived about 23 percent of the unpaid contributions. GAO also found that: (1) SEPPAA prevented claims from plans terminated by firms that were not financially distressed, but financially distressed employers accounted for 96 percent of the claims from 1983 through 1985; (2) SEPPAA increased employers' liability to PBGC to 75 percent of unfunded pension benefits; (3) PBGC claims against employers in bankruptcy proceedings have a low priority; (4) SEPPAA increased the annual premium rate more than 300 percent, but the rate increase will not generate enough revenue to offset the growing PBGC deficit; (5) the PBGC deficit tripled in 1986, primarily because of large claims from one bankrupt employer's terminated plans; and (6) the annual drain on PBGC assets could render the program insolvent by 2002.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Legislation, P.L. 100-203, was signed into law on December 22, 1987. It requires employers with underfunded plans to increase their contributions to plans and for pension plan contributions to be made quarterly. Consideration was given to reducing benefits guaranteed by the program; however, this action was not included in the legislation.

    Matter: Given the uncertainties associated with the long-term effects of SEPPAA on the program's financial condition, Congress may wish to consider additional changes to enhance the program's viability. To help control potential claims against the program, such changes could include: (1) raising the minimum contribution requirements to reduce plans' unfunded benefits; (2) requiring employers to make contribution payments to their plans sooner than 8-1/2 months after a plan year ends; and (3) reducing benefits guaranteed by the program, for example, eliminating coverage of any benefit improvements that become effective within 5 years of plan termination.

  2. Status: Closed - Implemented

    Comments: P.L. 100-203 was signed into law on December 22, 1987. It requires an employer's unpaid contributions to pension plans be afforded the status of a tax claim, and gives it greater priority in bankruptcy proceedings. It also changed the current PBGC flat-rate premium of $8.50 per participant to a variable rate with a base of $16 that can be increased to a maximum of $50 per participant.

    Matter: Given the uncertainties associated with the long-term effects of SEPPAA on the program's financial condition, Congress may wish to consider additional changes to enhance the program's financial viability. To enhance the financing of claims that do occur, possible changes include raising: (1) the priority of PBGC claims against employers that are in bankruptcy proceedings; and (2) the premium rate again to provide the revenue needed to retire the program's deficit and pay for projected unrecoverable claims.

 

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