PBGC

PRIVATE PENSIONS
Recent Experiences of Large Defined
Benefit Plans Illustrate Weaknesses in
Funding Rules
http://www.gao.gov/new.items/d05294.pdf

The GAO Findings were predictable, though much regretted. Some 62.5% of Sponsors are not making yearly cash contributions, through the use of Plan accounting procedures (FSA) to assert that equivalent contribution has been made into the Fund. The trouble comes in their declaration of the highest Interest rates of return on Funds, along with prior Year contributions, all when the Funds, themselves, are underfunded--over half sampled where Funds are less than 90% capitalized.

The additional funding charge (AFC) lacks real power, where they are applied because the Sponsors did not make a cash contribution in the Year the AFC was assessed while the Fund is less than 80% funded. Current Reporting procedures lack transparency and probably understate the underfunding of the Plans. This combined with the use of FSAs propel the chronic underfunding.

Fund Service Accounting (FSA) procedures were allowed by Congress to promote flexibility in funding of Pensions (Obstensible goal), but are used in practice to evade Funding obligations by Sponsors. FSAs resemble the Tax credits granted to Business during the later Bush Years, but provide far greater damage.

Prognosis: The Pension Benefit Guaranty Corporation will fail, if current practice is allowed. Obligations will continue to pile up, as Sponsors renege on their commitments.

The only safeguard to Pension Benefits is forcing Sponsors to make cash contribution of realizable gain of full funding (full Benefits within the year range of predicted retirement) each Year, without recourse to Credits from prior contribution Years. There is a limit to how many, and what, incentives should be granted to promote economic growth. Pension Benefits are a Third Rail, funded only with great difficulty at later Date. lgl