The US Pension Benefit Guaranty Corporation (PBGC) has posted a record deficit of $33.5 billion for the six months to March 31, tripling its previous deficit of $11 billion for the 2008 financial year.
The PBGC attributed half the increase in the deficit - $11 billion - to the cost of taking over and terminating pension plans of troubled companies in the first half of the financial year, and an allowance for probable future terminations. Of the remainder, $7 billion represents accounting charges associated with the fall in US interest rates, which means that the guarantor discounts its liabilities less steeply; $2 billion represents actuarial charges; and $3 billion represents losses on its investments.
The news comes after a period of success for the PBGC. At the end of the 2008 financial year, it had cut its deficit to $11.3 billion from $14.1 billion in 2007 and $18.9 billion in 2006. In February last year, it abandoned its policy of using a liability-driven investment approach to managing its portfolio, then worth $55 billion, in favour of a 45% bonds/45% equities/10% alternative investments split. By the end of April this year, it held 30% in equities, 68% in bonds and only 2% in alternatives, all of which it had inherited from failed pension schemes, the guarantor said.
A particular concern for the PBGC is the US auto industry. It warned auto manufacturers and suppliers have left their pension funds $77 billion under strength, of which the PBGC would have to meet $42 billion in the event of a collapse. As of the end of 2008, the PBGC's total investible assets were only slightly above this at $47.1 billion, which has since dropped to $44 billion at the end of March.
Acting director Vincent Snowbarger told Congress yesterday: "The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly spread over the lifetimes of participants and beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed."
By the end of 2018, he added, the PBGC predicts the deficit would have shrunk to $23 billion. But in the short term, the corporation's workload was set to increase steeply. "During the first six months of FY 2009, a time when the economy was weakening, the PBGC took in about the same number of plans as in all of FY 2008 and nearly four times the number of participants - 62 pension plans with more than 75,000 participants and $480 million in unfunded liabilities," stated Snowbarger.
He also complained the PBGC's other function - overseeing and resolving pension problems before the plans had to be terminated -had been hindered by a 2006 change in US law that reduced the amount of information companies had to report on their pension plan funding. As a result, he said, "the PBGC will no longer receive information on some large underfunded plans that pose a significant risk".
More on Insurance
Standard-setter defers decision on valuation basis
UK insurer plans wider range of investments for annuity fund
Clive Davidson reviews how proxy models have developed since their inception a decade ago
Hamza Bahaji, Stephanie Ridon and Emmanuel Bourdeix propose a tracking error driven allocation approach applicable to a broad equity universe
Sign up for Risk.net email alerts
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
Nominated for two technology awards
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.