In a marked turnaround, the Pension Benefit Guaranty Corporation (PBGC) reports that the solvency of its two insurance programs – the single-employer program and the multi-employer program – is improving.
The report marks a continuation of the growing creditworthiness of the single-employer program, but a change in the fortunes of the multi-employer program, whose creditworthiness is declining and about which there have been gloomy projections. âReports show a substantial improvement in the outlook for the PBGC’s multi-employer insurance program,â says PBGC,
The agency attributes the change to the enactment of the American Rescue Plan Act of 2021. The difference between these projection ratios and the reports of recent years is night and day; and this is great news for the millions of workers, retirees and their families who rely on the agency, âPBGC Director Gordon Hartogensis said in a press release.
But ARP was not the only reason for the improvement, says the PBGC; it also indicates that changes in recent economic data and assumptions, such as discount rates and asset returns, help explain it.
Projections from the Multi-Employer Program show an average improvement in net financial position (i.e. the average of all modeled scenarios) of $ 57 billion, from $ 63.7 billion, reported as of September 30, 2020, to a negative projection of $ 6.7 billion. September 30, 2030.
This, according to the PBGC, is mainly due to the enactment of the ARP, which is expected to result in the “derecognition” of liabilities for ongoing plans that had previously been recognized as probable losses, and the deferral or avoidance of others. potential insolvencies beyond Fiscal Year 2030 (FY). According to the report, Special Financial Assistance (SFA) provided under the ARP extends the solvency of qualifying plans that were previously recorded as probable losses by more than 10 years. Now, according to the PBGC, these plans are expected to be reclassified from probable losses in fiscal 2021.
The turnaround is so dramatic, according to the PBGC, that while the 2020 report estimated that the multi-employer program would likely run out of cash in fiscal year 2026, it no longer expects it to become insolvent in fiscal year 2026. 10 year projection period. In most scenarios, he says, the EFA provided to qualifying plans will prevent the insolvency of the program for more than 30 years.
There is a caveat, however: the report notes that future return on plan assets and plan contribution earnings, which are unknown, create uncertainty as to whether and when the multi-employer program will run out of cash. .
Single Employer Program
As of September 30, 2020, the single employer program was generating revenues of $ 15.5 billion. The PBGC predicts that they will increase by $ 34.4 billion to approximately $ 49.9 billion on September 30, 2030.
The PBGC also explains that the Single Employer Program got off to a better start than expected. In FY2020, actual premium income and asset / liability earnings exceeded the average projections in the FY2019 Projections report, and at the same time, actual claims and expenses were slightly lower than expected. average projections of this report.
And the news just keeps getting better. As the Single Employer Program’s net position continues to improve, according to the PBGC, the possibility of a return to a negative net position is even lower, even though claims are very high.
But as with the multi-employer program, the PBGC says there are a few caveats with the single-employer program. He notes that existing underfunding is more acute in plans sponsored by companies with the highest risk of financial distress, and warns that any economic downturn increases both underfunding and the likelihood of claims being made. on the PBGC.
The PBGC clarifies that employer-sponsored plans with a credit rating below the investment grade had a total underfunding of $ 176 billion as of December 31, 2019, according to the PBGC’s annual report for the fiscal year. 2020, up from $ 155 billion as of December 31, 2018. This, he says, includes “a significant portion of the estimated $ 560 billion in total underfunding in single employer plans insured by the PBGC based on deposits from the 2018 form 5500 â.