GMRA has had questions and conversations with members that indicate there are misunderstandings concerning the PBGC and its role relative to “defined benefit pension plans,” such as the GM salaried pension plan.
In case you didn’t know …
GM’s last contribution to the plan was made before October, 2004. It is our understanding that there is no requirement, or intention, to make additional contributions to the fund until 2013 due to the unused credits GM has accumulated toward the pension plan. At the same time, benefit payouts continue to escalate as the retiree numbers grow.
According to PBGC sources, it is common for companies that are encountering challenging financial circumstances to avoid funding pension plans or to divert capital from the pension fund for re-structuring costs or other business purposes. In a 2008 letter to GM, the PBGC expressed concerns to GM that the attrition programs and lump-sum payments in 2006 and 2008 were not-prefunded, and were not taken into account in previous funding determinations. As a result, the PBGC warned GM that future funding requirements could increase and benefits may not be fully guaranteed under ERISA law. The attrition programs (buyouts) increase the risk of loss to plan participants as well as the risk to the PBGC, in the event of the plan failure.
Underfunding of a pension plan does not result in an automatic takeover of a plan by PBGC. However, under certain circumstances, the PBGC may on its own initiative terminate a pension plan. For example, if the PBGC estimates that a plan is significantly underfunded and may not be able to meet its obligations.
Most PBGC initiated terminations occur when the PBGC determines that plan termination is needed to protect whatever assets are remaining in the Pension Plan to protect the interests of plan participants and of the PBGC insurance program.
The PBGC formulas for determining acceptable funding levels, and subsequent takeover, are not the same formulas used by other agencies, such as ERISA. When a company reports that a plan is 80% funded, typically PBGC calculations consider the plan 60% funded (or lower!). If the PBGC takes over the plan, most retirees (especially early and recent retirees) lose a substantial portion of their promised benefits. See the charts in the following link for details on how reductions in pensions are determined by PBGC standards. http://www.gao.gov/new.items/d10492.pdf (Pages 63-66).
The GM salaried plan could be at risk. The plan was underfunded by $3.7 billion and was 88.8% funded by ERISA standards. When PBGC took over the Delphi Salary Plan in March 2010 funding status as of 9/30/09 was 85.6% with assets of $ 2.99 Billion and liabilities of $ 3.50 Billion which means the plan was $.5 billion underfunded.
In 2009, the PBGC’s own deficit nearly doubled to $22 billion from $11.2 billion in 2008 as the agency was hit by major losses from failed plans it assumed. In 2009, the PBGC took over 144 pension plans -- up from 67 in 2008.
Additional helpful information is available from the PBGC website:
