PBGC Sees Hike in Multiemployer Benefit Payments Ahead

(August 23, 2010) — The Pension Benefit Guaranty Corporation (PBGC) expects to spend about five times as much in the next 10 years as it has over the past three decades in multiemployer benefit payments.

The group, a US government-sponsored, privately funded insurance program whose rules are mandated by Congress, said it has shelled out more than $500 million in financial assistance to 62 insolvent multiemployer plans since fiscal year 1981. The agency estimates its liability for such payments will rise over the next 10 years to nearly $2.3 billion, paid to 104 plans.

“The increase in liabilities means there is financial stress in many industry sectors where multiemployer plans still exist,” PBGC spokesman Jeffrey Speicher told ai5000. “We foresee the need to provide additional financial assistance in the future, according to the law, when a multiemployer pension can no longer meet its obligation,” he said, noting that PBGC currently has a shortfall of about $700 million, yet it has assets in its multiemployer program to meet its obligations.

In its Pension Insurance Data Book 2009, the PBGC highlighted the burgeoning shortfall in the multiemployer program. The group said the number of insolvent plans receiving financial assistance on a year-by-year basis has continued to grow, increasing from just one plan receiving about $300,000 in 1981 to 43 plans receiving nearly $86 million in 2009.

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According to the PBGC’s release, if an insolvent multiemployer pension plan recovers financially, it is required to repay the financial assistance with interest. However, in the program’s nearly 30 years of existence, only one multiemployer plan has repaid PBGC for the financial assistance it received. The disclosure by the PBGC follows ever-growing worries — amid declining stock markets and interest rates — about defined benefit pension schemes in the public and private sectors that pay retirees a percentage of their pay for their entire lives.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(August 23, 2010) — Despite an uptick in equity markets, a study by Pension Capital Strategies (PCS) has found that the number of FTSE 250 companies providing final salary benefits to a majority of employees has dropped to just 15, down from 20 a year ago.

The decline in DB coverage reflects mounting difficulties for companies seeking to prevent growing pension liabilities in the face of economic hardship and longer life expectancies. An additional study earlier this month by Mercer showed that as a result of changes in accounting assumptions, median liabilities at FTSE 100 companies jumped about 20% last year, as pension scheme longevity assumptions increased for a fourth consecutive year. “Rising life expectancy continues to have serious financial implications for pension schemes,” Mercer’s Warren Singer stated in the research report.

According to PCS, an advisory group that is owned by the insurer JLT Group, out of the FTSE 250, only 144 companies have any type of pension scheme, with 86 companies still providing “more than a handful” of current employees with DB benefits. PCS found that the pension liabilities of FTSE 250 companies have grown from £55 billion to £68 billion over the past year.

Meanwhile, the report by PCS revealed that 21 FTSE 250 companies, including FirstGroup, Premier Foods, and Go-Ahead, have total disclosed pension liabilities greater than their equity market value. Yet, following new financial measures from companies to support their schemes, the total pension deficit of FTSE 250 schemes as of June 30 fell by £1 billion over the year to £11 billion, PCS stated.

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“More than ever before, pension liabilities are impacting decisions in the boardroom. Faced with a challenging business cycle, it is not surprising that companies are reacting by closing down their final salary pension schemes,” said Charles Cowling, managing director at PCS, according to The Telegraph.

Separately, research by MetLife Europe has shown that market volatility has slashed annualized returns from direct investment in the FTSE 100 to 0.5% over the past ten years. The firm showed total returns on £200,000 invested in December 2009 had only grown to £212,000, as the FTSE 100 experienced high volatility through this period. “Governments cannot control the stock markets but they can provide the legislative framework for providers to offer flexible and transparent products aimed at maximising pension saving,” MetLife UK managing director Dominic Grinstead said, according to Global Pensions.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742