The Pension Benefit Guaranty Corporation (PBGC) has work to do in order to accomplish its mission and better serve plans and participants, says a newly released report by the PBGC Participant and Plan Sponsor Advocate.
The 2023 Annual Report of the Participant and Plan Sponsor Advocate Pension Benefit Guaranty Corporation does not mince words. Released Dec. 29, it is the 10th annual report by the Office of the Advocate, which was established in 2013.
In preparation for the report, the Office of the Advocate held discussions with participants and plan sponsors regarding their experiences with the PBGC over those 10 years. They found many common themes.
Participants
The Office of the Advocate reports dissatisfaction among plan participants. It notes that there are “ongoing issues” with the PBGC’s Appeals Board and overall administrative review process, and that there have been complaints about its fairness, impartiality, and thoroughness.
The amount of time it takes to make a determination can also be an issue, says the Office of the Advocate. And disputing a determination the PBGC makes, says the report, can subject a participant to an inconsistent initial determination process that can take months or even years. A participant whose benefit claim is denied during the initial determination phase can go to the PBGC Appeals Board, but that body also can take up to a year to make a final determination. A participant can take a denial by the Appeals Board to a federal district court, but the Office of the Advocate considers this to not be a viable administrative review option for those who are elderly or retired or who have more limited financial resources.
Further, says the report, the PBGC “appears to have little or no written guidance” governing its determination process, aside from high-level administrative review regulations PBGC staff “drafted decades ago.” That, it says, has resulted in inconsistent review by the Appeals Board. In addition, they say, “there appear to be few constraints” on how the board interprets its own regulations other than its written internal procedures.
Plan Sponsors
The Office of the Advocate says that plan sponsors have complained about longstanding issues such as:
- case review delays;
- the absence of oversight and management;
- communication lapses;
- departmental coordination issues; and
- an overall lack of transparency about PBGC processes and procedures.
The report notes that, like plan participants, plan sponsors applying for a distress termination under the business continuation test encounter “a lengthy and inefficient review process” that can take months or years.
Broad Problems
The Office of the Advocate expressed broad concerns about how the PBGC serves both participants and plan sponsors. And it says that the problems with the PBGC’s administrative review process highlight how fair and equitable the process is and can have a detrimental effect on participants.
“Actions by some PBGC employees clearly demonstrate a lack of understanding that the agency exists to serve participants and plan sponsors and to help them solve the problems that they bring to us,” says Constance A. Donovan, PBGC Participant and Plan Sponsor Advocate, in her message at the introduction to the report. “To the contrary,” she continues, the PBGC “frequently fails to understand how its interactions raise obstacles for participants and plan sponsors.” Further, says Donovan,
“PBGC often appears to look for reasons to deny a benefit entitlement or prolong negotiations with a plan sponsor in a distress termination, threatening whether the sponsor can even be a going concern. PBGC takes a most adversarial approach in its dealings with participants and plan sponsors, and that must be closely investigated and managed to extinction.”
Donovan writes that PBGC personnel evince an “overall sense of mistrust” towards participants and plan sponsors, which she says drives “adversarial encounters and leads to outsized and unreasonable demands” by the PBGC—which, in turn, contributes to long delays in settling disputes, as well as “extraordinary” financial and personal costs to participants and plan sponsors.
The Office of the Advocate says that the PBGC’s leadership shows “little internal urgency” in addressing long-term problems, and that the PBGC’s attention appears predominantly focused on implementing the Special Financial Assistance Program.
Wider Concerns
The Office of the Advocate says that the private pension system has been declining in recent decades, and notes that the PBGC’s most recent Pension Insurance Data Tables show a 30% drop in the number of covered participants in DB plans in the past decade, as well as what it calls a “modest” decline in the number of plans. It attributes hesitancy to reopen or adopt new pension plans to volatility, risk, and escalating costs.
The concern of plan participants and plan sponsors is not isolated to the PBGC alone, says Donovan. “Universally, both participants and plan sponsors, including their advisors, shared a deep concern for the eroding of the defined benefit plan system from the landscape—a system that was once available to build economic security through a lifetime income stream in retirement,” she says. Donovan continues,
“All forms of pension de-risking have led to a rapid decline of the defined benefit structure, leaving its mark on generations of people who now only have defined contribution assets and Social Security to rely upon for retirement income. The current retirement system is certainly not the three-legged stool people were taught to expect, particularly when the defined contribution scheme emerged promising to be an important part of the stool but was not originally cast as the sole source of one’s retirement income other than Social Security.”
Ironically, Donovan lays some of the blame for the shakiness of the DB system on the very agency created to help it survive and prosper.
PBGC premiums. That shakiness, Donovan suggests, is in part due to the premiums the PBGC charges. Those premiums, Donovan says, are an “ominous note that threatens the viability of the defined benefit system, completely contrary to the statutory mission of the agency to maintain and preserve the private defined benefit structure.” She calls the premiums an “extraordinary financial burden that is driving plan sponsors from the defined benefit structure, threatening the retirement security of upcoming generations who lack the economic security of a lifetime income in retirement.” The Office of the Advocate, too, says that premiums were often cited as “a major factor” behind freezing, terminating, or de-risking a plan.
Further, says the Office of the Advocate, at a time when many plans’ funded status has improved markedly and the PBGC’s Single Employer Trust Fund also is well-funded, some plan sponsors are questioning the premiums they pay because the risk they insure against “is no longer relevant.”
PBGC funding surplus. The PBGC’s funding surplus, Donovan adds, is not necessarily the good news most consider it to be. She calls the $44.6 billion surplus “extraordinary” and “far in excess of anything that the agency needs.” She observes that it is not the result of tax revenue, but arises “from plan sponsors who, for years now, have not only made significant contributions to their pension plans but have also overpaid PBGC premiums to cover a level of risk associated with the defined benefit system that simply no longer exists.” She argues that the surplus, “combined with debilitating premiums, has led to an exodus of employers from the defined benefit system.”
‘To Do’ List
Donovan argues that the PBGC needs to address and correct the mindset that creates mistrust of plan sponsors and participants and that it should follow an “unvarnished and fact-based approach” to restructure the PBGC’s basic culture. Accomplishing this, she says, requires that the PBGC Board of Directors—and Congress, as well—maintain a strong presence and oversight.
Actions the Office of the Advocate calls on the PBGC to take include:
- improve its administrative review process;
- establish a task force of diverse members, including knowledgeable individuals from outside of PBGC, to examine the entire administrative review process and create written guidance for the PBGC’s Appeals Board;
- establish a mediation or arbitration option for participant disputes as an alternative to litigation;
- make its benefits administration policies and procedures accessible to the public on the agency’s website;
- require monthly written reporting on all Appeals Board cases to the PBGC Director and the Office of the Advocate;
- have an official review of its entire administrative review regulation;
- review internal processes for identifying and escalating stalled and complex matters;
- align its recoupment regulations and practices with the updated rules in SECURE 2.0;
- regularly meet with plan sponsors throughout the entire distress termination process on a scheduled basis;
- respond to all email or written communications from the plan sponsor within one business day;
- create a working group to draft written cross-departmental distress termination processes/procedures;
- provide monthly written reporting on all distress termination and post-termination collections or settlement cases to the PBGC Director, the PBGC Board Representatives and staff, and the Office of the Advocate; and
- memorialize its process for addressing excise taxes in out-of-bankruptcy distress termination cases.
The Bottom Line
The report suggests that the wider implications of a declining pension system are recognized. It says, “Stakeholders throughout the retirement space are aware of the potential impacts of a shrinking defined benefit system on Americans’ overall retirement security, which include declines in older Americans’ ability to afford housing, healthcare, and long-term care, and to pass on intergenerational wealth.”
While there is hesitancy to reopen or adopt new plans, the Office of the Advocate says, there still is “great interest” in pension plans as well as recognition of their benefits.
