SINGLE-EMPLOYER PROGRAM EXPOSURE

PBGC’s “expected claims” are dependent on two factors: the amount of underfunding in the pension plans that PBGC insures (i.e., exposure) and the likelihood that corporate sponsors of these underfunded plans encounter financial distress that results in bankruptcy and plan termination (i.e., the probability of claims).

Over the near term, expected claims result from underfunding in plans sponsored by financially weak firms. PBGC treats a plan sponsor as financially weak based upon factors such as whether the firm has a below-investment-grade bond rating. PBGC calculates the underfunding for plans of these financially weak companies using the best available data, including the annual confidential filings that companies with large underfunded plans are required to make to PBGC under Section 4010 of ERISA.

For purposes of its financial statements, PBGC classifies the underfunding of financially weak companies as “reasonably possible” exposure, as required under accounting principles generally accepted in the United States of America. The “reasonably possible” exposure as of September 30, 2003, as disclosed in Note 7 of the financial statements, ranged from $83 billion to $85 billion (valued using data as of December 31, 2002), compared to $35 billion for fiscal year 2002.

Over the longer term, exposure and expected claims are more difficult to quantify either in terms of a single number or a limited range. Claims are sensitive to changes in interest rates and stock returns, overall economic conditions, the development of underfunding in some large plans, the performance of some particular industries, and the bankruptcy of a few large companies. Large claims from a small number of terminations and volatility characterize the Corporation’s historical claims experience and are likely to affect PBGC’s potential future claims experience as well.

Methodology for Condisering Long-Term Single-Employer Program Claims

No single underfunding number or range of numbers—even the reasonably possible estimate— is sufficient to evaluate PBGC’s exposure and expected claims over the next 10 years. There is too much uncertainty about the future, both with respect to the performance of the economy and the performance of the companies that sponsor insured pension plans.

PBGC uses a stochastic model—the Pension Insurance Modeling System (PIMS)—to evaluate its exposure and expected claims.

PIMS portrays future underfunding under current funding rules as a function of a variety of economic parameters. The model recognizes that all companies have some chance of bankruptcy and that these probabilities can change significantly over time. The model also recognizes the uncertainty in key economic parameters (particularly interest rates and stock returns). The model simulates the flows of claims that could develop under thousands of combinations of economic parameters and bankruptcy rates. (For additional information on PIMS and the assumptions used in running the model, see PBGC’s Pension Insurance Data Book 1998, pages 10-17, which also can be viewed on PBGC’s Web site at www.pbgc.gov/publications/databook/ databk98.pdf.)

PIMS starts with data on PBGC’s net position (an $11.2 billion deficit in the case of FY 2003) and data on the funded status of approximately 350 plans that is weighted to represent the universe of PBGC-covered plans. The model produces results under 5,000 different simulations.

Under the model, median claims over the next 10 years will be about $2.2 billion per year (expressed in today’s dollars); that is, half of the simulations show claims above $2.2 billion per year and half below. The mean level of claims (that is, the average claim) is higher, about $2.6 billion per year. The mean is higher because there is a chance under some simulations that claims could reach very high levels. For example, under the model there is a 10 percent chance that claims could exceed $4.7 billion per year.

PIMS then projects PBGC’s potential financial position by combining simulated claims with simulated premiums, expenses, and investment returns. The probability of a particular outcome is determined by dividing the number of simulations with that outcome by 5,000.

The median outcome is a $16.2 billion deficit in 2013 (in present value terms). This means that half of the simulations show either a smaller deficit than $16.2 billion, or a surplus, and half of the simulations show a larger deficit. The mean outcome is an $18.7 billion deficit in 2013 (in present value terms).

The median projected financial position is lower than last year’s median projection, both of which were based on a wide range of possible outcomes for each year of the projection. The drop in the median projection is attributable to several factors. PBGC’s own financial position eroded by $7.6 billion during 2003. Despite some improvement in plan asset returns over the year, total underfunding increased in PBGC-covered plans due to a further drop in interest rates. Further, the increase in underfunding in plans of financially weak companies— almost two and a half times the 2002 values—was even greater than the increase in total underfunding.

The graph below illustrates the wide range of outcomes that are possible for PBGC over the next 10 years. The other statistics listed on the graph give further details on the distribution of outcomes. The standard deviation is a measure of how widely the distribution is spread over its range and the percentiles indicate the likelihood of a position below particular values. For example, the model shows a 10 percent chance that the deficit could be as large as $49.0 billion and a 10 percent chance that PBGC could have a surplus of $8.4 billion or more. The probability of a surplus of any amount in 2013 is 19 percent.

Figure - Distribution of PBGC’s Potential 2013 Financial Position - This chart depicts the range of possible outcomes for PBGC's potential financial position in 2013 as determined through 5,000 simulations using varying combinations of key economic assumptions and bankruptcy rates. PBGC uses the Pension Insurance Modeling System to project the agency’s claims and net position through these 5,000 different simulations. The mean outcome for PBGC is a deficit of $18.7 billion in 2013, in present value terms; the median outcome is a $16.2 billion deficit in 2013, in present value terms; the standard deviation is $22.7 billion; there is a 5% chance of a deficit of $60.3 billion, a 10% chance of a deficit of $49 billion, a 25% chance of a deficit of $31.8 billion, a 25% chance of a deficit of $3.7 billion, a 10% chance of a surplus of $8.4 billion, and a 5% chance of a surplus of $15.3 billion. The probability of any surplus in 2013 is 19 percent.

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