Technical Update 00-3: PBGC's Early Warning Program
July 24, 2000
(contact information in section IV.3. updated on January 4, 2008)
1. What is the purpose of this Technical Update?
The PBGC is providing this Technical Update to help plan sponsors and pension practitioners anticipate when the PBGC is likely to be concerned about a business transaction and understand the types of pension protections we may seek through the Early Warning Program.
2. What is the basis for the PBGC's Early Warning Program?
Under ERISA section 4042(a)(4), the PBGC "may institute proceedings . . . to terminate a plan whenever it determines that the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated." We find that we can avoid terminating a plan by working with the plan sponsor to obtain protections before a business transaction significantly increases the risk of loss.
3. What is in this Technical Update?
This Technical Update explains how the Early Warning Program works. It describes when we might contact companies for further information, the types of business transactions that may cause concern, the situations in which we may seek protections for the pension insurance program, and the types of protections that we may seek.
II. Companies and Plans in PBGC's Screening Pool
1. What transactions does the Early Warning Program focus on?
The PBGC focuses on transactions that may pose an increased risk of long-run loss to the pension insurance program. In reviewing for long-run loss, we generally focus on transactions by two types of companies: (1) financially-troubled companies and (2) companies with pension plans that are underfunded on a current liability basis.
2. What screening criteria does the Early Warning Program use?
The PBGC contacts a company for further information about a transaction only if:
(1) The company has a below investment-grade bond rating and sponsors a pension plan that has current liability in excess of $25 million, or
(2) The company (regardless of its bond rating) sponsors a pension plan that has current liability in excess of $25 million and that plan has unfunded current liability in excess of $5 million.
Note: The PBGC will use the most recent bond ratings published by major rating agencies. The PBGC will compute a plan's unfunded current liability by taking the difference between the current value of plan assets as reported on the most recently filed Form 5500, Schedule B (for 1998, line 1b(1) of the Schedule B) and the current liability as reported on the same Form 5500, Schedule B (for 1998, line 1d(2)(a) of the Schedule B).
3. What can I do if the PBGC contacts me on the basis of information that I believe is incorrect or out of date?
Before contacting a plan sponsor, we will review the data reported on the most recent Form 5500, Schedule B available to us. Our initial contact letter will show the pension plan data we used to determine that an initial contact should be made. If you have a more recently filed Form 5500, Schedule B, or if our information is incorrect, you should send us the up-to-date or corrected data.
4. Why does the Early Warning Program use corporate bond ratings and underfunding on a current liability basis as its screening criteria?
The PBGC has adopted screening criteria that are readily available and easily understood by companies. Corporate bond ratings distinguish strong companies (i.e., investment grade) from weak companies (i.e., below investment grade). Similarly, unfunded current liability is a measure of underfunding that is calculated each year by plan actuaries and reported on Form 5500, Schedule B.
5. What impact will the screening criteria have on the number of companies contacted under the Early Warning Program?
Applying the screening criteria to a sample of companies contacted under the Early Warning Program during Fiscal Year 1999 shows that we would have made about 60 percent fewer inquiries.
III. Business Transactions of Concern to the PBGC
1. What kinds of business transactions may be of concern to the PBGC?
The PBGC is particularly concerned about transactions that substantially weaken the financial support for a pension plan.
2. What are some examples of these types of business transactions?
Examples of transactions that may substantially weaken the financial support for a pension plan:
(1) A breakup of a controlled group, including a spin-off of a subsidiary,
(2) A transfer of significantly underfunded pension liabilities in connection with the sale of a business,
(3) A leveraged buyout,
(4) A major divestiture by an employer who retains significantly underfunded pension liabilities,
(5) A payment of extraordinary dividends, or
(6) A substitution of secured debt for a significant amount of previously unsecured debt.
IV. PBGC Information Needs
1. Why does the PBGC request additional information under the Early Warning Program?
Frequently, the PBGC first learns of a transaction from reports in the financial press. Because limited information is reported in the press, we cannot always determine if the transaction is of concern without contacting the company and getting more information. In order to assess whether a transaction poses a risk, we may need additional information about the transaction, the company's current financial situation, and the funding status of its defined benefit plans. In addition to Early Warning Program information, the PBGC also obtains financial and actuarial information about certain companies, plans, and transactions under ERISA sections 4010 (annual reporting) and 4043 (reportable events).
2. If my company meets one of the screening criteria, should I expect that the PBGC will make an inquiry about my business transactions?
Even if a company meets the screening criteria, we are unlikely to make an inquiry about a proposed business transaction unless the transaction appears to pose a significant increase in the risk of long-run loss to the pension insurance program or unless we require additional information about the transaction to make this judgment.
3. Can I contact the PBGC in advance about a proposed business transaction?
Companies and their advisors are encouraged to contact us in advance of a transaction. By contacting us in advance, companies can avoid any uncertainty about whether the transaction raises any PBGC concerns and minimize any disruption in corporate plans or actions. Calls should be made to Robert Bacon, Acting Director- Department of Insurance Supervision and Compliance, at (202) 326-4070, extension 3962 (e-mail: firstname.lastname@example.org) or, in his absence, Ajit Gadre, Manager- Corporate Finance and Restructuring Group at (202) 326-4070, extension 3655 (e-mail: email@example.com).
4. What information does the PBGC request in an initial inquiry?
In an initial inquiry, we generally request information about the effect of a transaction on any defined benefit pension plans -- whether the plans will stay with the plan sponsor, move to a new plan sponsor, or be split between the current sponsor and a new sponsor. We may also ask for recent actuarial information for the plans, including the most recent Form 5500 and actuarial valuation reports. We will make all initial inquiries in writing, not by telephone.
5. What information does the PBGC request in a follow-up inquiry?
In a follow-up inquiry, we may ask for financial information on the plan sponsor (or any of its subsidiaries or divisions) and its controlled group. If a plan is moving to a new sponsor or being split between the current sponsor and a new sponsor, we ask for additional information about the number of active, deferred vested and retired participants who will be affected by the transaction. We may also ask for the latest market value of each plan's assets, any contributions made that are not included in the market value of assets, and information about any events that have had a material effect on the plans since the last actuarial valuation.
6. What happens when the PBGC determines after the initial or follow-up inquiry that no action is necessary?
If, after reviewing the additional information submitted, we conclude that no further action is necessary, we will send a letter advising that the inquiry is closed. We will send a closing letter as soon as we reach a decision, but normally no later than 30 business days from the day we received the information requested.
V. When the PBGC Gets Involved
1. What happens if the PBGC concludes that a transaction may create an increase in risk?
If we determine that a transaction could result in a significant increase in the risk of loss under ERISA section 4042(a)(4), we generally will seek to negotiate with the company to obtain protections for the pension insurance program in lieu of terminating the plan.
2. What types of protections will the PBGC seek?
We will work with the company to tailor a settlement that is appropriate to the business transaction and financially feasible for the company. Protections are limited to amounts necessary to address the concerns described in ERISA section 4042(a)(4): ". . . that the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably. . . ."
The following are examples of the types of protections that we have negotiated in the past:
(1) Cash contributions to a pension plan. The PBGC has negotiated for additional cash contributions to the plan.
(2) Letters of credit. The PBGC has negotiated for letters of credit to secure promises to make future pension contributions or to secure underfunded pension plan liabilities.
(3) Security interests. The PBGC has negotiated for a pledge of specific company assets to secure unfunded pension plan liability.
(4) Guarantees. In controlled group breakup transactions, the PBGC has negotiated for guarantees by financially stronger members that are leaving the controlled group either to assume the pension plan or to pay for termination liability if the plan sponsor cannot support the plan following the transaction.
3. How does the PBGC handle confidential business information that it receives under the Early Warning Program?
Generally, the PBGC and the company sign a confidentiality agreement to ensure that confidential business information is not released to the public.
VI. Compliance with Section 414(l)
1. Does the PBGC enforce section 414(l) of the Internal Revenue Code?
The Internal Revenue Service is the agency that enforces section 414(l) of the Internal Revenue Code, the section that governs the allocation of assets in plan spin-offs. The PBGC will not review spin-off transactions for section 414(l) compliance. However, the PBGC will review a spin-off to determine whether it significantly increases the risk of long-run loss to the pension insurance system.