February 2, 2012
For additional information:
Jason Hammersla

Pension plan underfunding, PBGC 'deficit' artificially inflated by historically low interest rates

Long-term policy should not be dictated by temporary economic conditions

WASHINGTON, DC — "Much of the crisis facing employee pension plans today has to do with historically low interest rates that are artificially overstating pension plan liabilities and the Pension Benefit Guaranty Corporation's (PBGC) reported deficit," American Benefits Council President James A. Klein said this morning in conjunction with a hearing held by the House of Representatives Committee on Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions. "Anytime you evaluate a long-term obligation like a pension, with a snapshot point in time you will get a skewed and very misleading picture — either positively or negatively," Klein said.

"Low interest rates account for almost 80 percent of the PBGC's self-reported deficit. These low rates are the result of a prudent national policy to help stimulate the economy. However, low interest rates translate into a calculation of higher pension liabilities. Therefore, when interest rates rise in the future, that artificially created deficit will shrink, if not evaporate," Klein said. "The remaining 20 percent of the deficit results from PBGC using an interest rate that is materially lower than the rates employer-sponsored plans are legally required to use." The Council enumerated "ten reasons to doubt the PBGC deficit" in a November 15, 2011, news release.

"Even if the deficit were accurate, it is a completely inappropriate basis for determining premiums. The imposition of a costly new premium regime will not materially improve pension plan solvency," Klein said. "There is no question that the PBGC's obligations are directly affected when underfunded pension plans terminate, and that is why public policy should be designed to help employers maintain their plans. But the most significant threat to defined benefit plans — and the PBGC — is not underfunding, since both the PBGC and most pension plans have sufficient assets to pay beneficiaries well into the future. The more urgent challenge is the persistent year-to-year volatility in funding obligations. Historically low interest rates have distorted the future value of investments, making healthy pension funds appear less well funded than they truly are."

Employer pension plan sponsors are reporting that mandatory contributions for 2012 are soaring, many times more than what would be required under normal interest rates. When the interest rates rise again, this will cause plans to be dramatically overfunded. "For most companies, the amounts locked away to overfund healthy plans now is money that cannot be used effectively by the company — for hiring workers, facility construction or capital investment. This backwards approach to plan funding hurts employees, the employers and the economy," Klein said.

The Council has offered a simple funding proposal that would raise federal revenue and save existing jobs by resolving the current conflict between economic policy and pension policy.

"The artificial underfunding crisis can only be resolved by addressing the real cause: historically low interest rates as applied to pension plans and the PBGC. Bleeding pension plans for more premium dollars will only weaken the defined benefit system," Klein said. "The PBGC's reported deficit is created by temporary financial conditions and ill-founded economic assumptions and should not be used to justify an excessive and costly new insurance scheme."

For more information, or to arrange an interview with Council staff, please contact Jason Hammersla, Council director of communications, at or by phone at 202-289-6700 (office) or (202) 422-4652 (cell).

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.