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Pension Agency Deficit Balloons

Largest shortfall in 35-year history

May 20, 2009

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There are many obscure government agencies in Washington you've probably never heard of. If you have a pension, you might want to start paying closer attention to one called the Pension Benefit Guaranty Corporation.

This small agency is responsible for stepping in and paying pensions if a pension fund suffers a short fall. Lately, they've been pretty busy writing checks.

In testimony before the Senate special Committee on Aging, Acting Director Vince Snowbarger said the agency posted a $33.5 billion deficit for the first half of fiscal year 2009. Based on unaudited financial numbers as of March 31, the deficit represents an increase over FY 2008's $11 billion shortfall, and is the largest in the agency's 35-year history.

"The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses," Snowbarger said in his written testimony. "The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed."

The $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

Snowbarger notes that as of April 30, the PBGC's investment portfolio consisted of 30 percent equities, 68 percent bonds, and less than 2 percent alternatives, such as private equity and real estate. All the agency's alternative investments have been inherited from failed pension plans.

The PBGC is closely monitoring companies in the auto manufacturing and auto supply industries. According to PBGC estimates, auto sector pensions are under-funded by about $77 billion, of which $42 billion would be guaranteed in the event of plan termination. The pension insurer also faces increased exposure from weak companies across all sectors of the economy, including retail, financial services and health care.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans.

The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

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