The Pension Benefit Guaranty Corporation (PBGC) has issued a report concerning single-employer contribution policy assumptions related to the Single-Employer Pension Insurance Modeling System (SE-PIMS). It provides updated assumptions used to project future single-employer plan contributions in that system for the fiscal year (FY) 2019 Projections Report.
The report was prepared by Steve Boyce and Evan Inglis of the PBGC’s Policy, Research and Analysis Department (PRAD); they are, respectively, an economist and an actuary with that department.
About the Assumptions
The PBGC has designed and used stochastic models to project possible scenarios for the pension system and possible exposure for the PBGC for two decades. Work on SE-PIMS began in 1992, and it became operational six years later. The PBGC initially developed SE PIMS to project general trends in PBGC’s financial condition.
Each year plan sponsors make contributions substantially in excess of the minimum they are required by law, the report says. Decisions about pension contributions are based on a variety of factors, it says, including legal requirements, financial incentives, a plan sponsor’s financial situation, the state of the pension plan, and the state of the overall economy and the financial markets. The perspective of each also plan sponsor differs, the report says; thus, “different decision-makers might make different decisions in the same circumstances.”
The objective of the assumption, Boyce and Inglis write, “is to reflect the key incentives, and generally how those incentives might change based on plan status and in different economic circumstances.” The assumption also should provide a realistic projection of how plan sponsor contributions will affect the PBGC’s premium income and future financial status, they say, and is structured so that contribution incentives change in response to changes in laws and regulations; for instance, if variable rate premium (VRP) rates or minimum required contributions (MRCs) change.
The assumption is a key factor influencing the key PBGC projections, including premium income, claims and financial status in the future.
Adjustments to the Assumptions
Boyce and Inglis say that a review of the SE-PIMS contribution assumption was undertaken primarily because VRP collections in recent years have exceeded projections. They note that the requirements and incentives for employers to contribute to their pension plans have changed during the past decade and have “evolved rapidly in the past several years.” This, they say, has taken place as the VRP increased and the per participant cap became applicable for many plans.
Boyce and Inglis say that actual contribution data shows that many sponsors continued to contribute amounts above the MRC even when their plan was funded well above the PBGC vested benefit liability (VBL) level—which is used as the primary measure of funded status. They add that data shows that some plan sponsors “are not aggressively trying to eliminate the VRP” and that as the VRP rate increased, the impact of the per participant cap in dampening the economic incentive to reduce pension plan underfunding has become more apparent.
In response to those trends, the report says, PRAD updated the assumption used to project future single-employer plan contributions in SE-PIMS for the FY 2019 Projections Report. This is important, they write, because the level of contributions assumed has “a material effect” on projection results. In addition, they say, it affects the funded status of plans, which, in turn, affects the level of VRP paid and the amount of underfunding included in projected PBGC claims. And it makes it easier to model effects of changes in MRC rules.
The single-employer contribution assumption adopted for the FY 2019 Projections Report is intended to reflect plan sponsor behavior that has been observed in recent years. The contributions reflect approaches associated with the economic circumstances each plan in each SE-PIMS scenario faces. Boyce and Inglis contend that such an approach better represents actual plan sponsor behavior than does the approach that had been used before; in addition, they say, it more effectively allows for modeling of proposed legislative changes.
The new assumption is based on a framework of contribution incentives, and specific parameters were determined based on back-testing, say Boyce and Inglis. The framework was based, in part, on a 2017 analysis that cataloged different approaches and mapped them to specific behaviors and incentives. That analysis, they say, was based on publicly available data through 2014. But since that year, funding relief in the form of reduced MRC levels was extended by the Budget Act of 2015, and PBGC VRPs “have increased significantly.” They used actual sponsor contribution data through 2018 to analyze and support the new assumption.
The New Assumptions
Under the new assumption, these incentives and motivating factors are translated into specific contribution amounts based on the following rules:
1. Plans funded above 100% VBL within the last three years will make the largest of the following:
- Maintain the VBL funded status by continuing to make contributions, potentially based on corporate pension accounting liabilities or service cost. The contribution is assumed to be a multiple of normal cost under the Pension Protection Act with the multiple decreasing as plan funded status increases.
- If the VBL funded ratio drops, seek to regain the highest VBL funded ratio in the last three years, making up 30% of the deficit relative to the higher funded ratio in each year.
- If the VBL funded ratio drops below 100%, seek to eliminate the unfunded VBL (UVBL) over a period of years, eliminating up to 5% of VBL underfunding each year.
2. Plans that have not been above 100% VBL in the past three years will make contributions that reflect a combination of possible contribution behaviors based on the Adjusted Funding Target Attainment Percentage (AFTAP) or VBL ratio. The combination of different behaviors reflects that plan sponsors may take different approaches despite being in the same circumstances. To wit:
- For plans with an AFTAP below 80%, a combination of these contributions with the mix between the following varying based on how large a contribution is needed to eliminate any funding restrictions:
- eliminating any benefit restrictions by funding to 80% on a PPA basis as soon as possible; and
- conserving cash for other purposes by making only the minimum required contribution, using 90% of the available credit balance.
- For plans with an AFTAP above 80%, the sponsor will make a combination of these contribution levels with the mix between the following varying based on the effective VRP rate being paid:
- the sum of these two contributions: (1) reducing the VRP by seeking to eliminate the UVBL over a period of years, eliminating up to 5% of VBL underfunding each year; plus (2) seeking to regain any higher funded ratio in the past 3 years over a period of years, making up 30% of the deficit relative to the higher funded ratio in each year; and
- conserving cash by making only the MRC, using 90% of the available credit balance.
Raw Data
The raw data, in the form of tables in appendices, is available here.
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