Human Capital & Careers

Bush’s Plan for the PBGC

''If nothing is done,'' said the pension agency's chairman, ''the financial integrity of the federal insurance system will be compromised and the p...
Stephen TaubJanuary 11, 2005

Secretary of Labor Elaine L. Chao, the chairman of the Board of the Pension Benefit Guaranty Corp., yesterday announced the Bush Administration’s plan to strengthen the solvency of the PBGC.

New rules call for higher employer premiums, more flexibility in funding by pension plans, and more information for plan participants as well as investors.

In November, the PBGC said its deficit was $23.3 billion. Meanwhile, US Airways and United Airlines are trying to terminate their plans altogether.

“I have become increasingly concerned as the number of terminated plans grows and the PBGC is forced to assume ever larger liabilities,” said Chao. “If nothing is done, the financial integrity of the federal insurance system will be compromised and the pension security of 34 million workers and retirees will be more at risk.”

The plan draws on three key elements:

• Reforming the funding rules to ensure that employers fully fund their plans and keep their benefit promises;
• Reforming the pension insurance premium structure so it better reflects the risks and costs of plan termination;
• Improving disclosure to workers, investors, and regulators so workers know how secure their pensions are and investors and regulators can evaluate plan sponsors’ financial obligations.

The proposal calls for setting funding targets based on the plan sponsor’s financial health and for making up funding shortfalls within a reasonable time — for example, seven years. It requires employers to forego promising additional benefits, or pay for them immediately, if the company is financially weak or the pension plan is significantly underfunded. The proposal also offers flexibility — allowing plan sponsors to make additional deductible contributions during good economic times.

In addition, the plan will index the premium that companies pay to reflect the growth in worker wages since 1991, when the current $19 rate was set.