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-investmentgrade 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, 2004, as disclosed in Note 7 of the financial statements, was $96 billion (valued using data as of December 31, 2003), compared to $82 billion for fiscal year 2003.

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 Considering 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 single-employer net position (a $23.3 billion deficit in the case of FY 2004) and data on the funded status of approximately 400 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 $1.7 billion per year (expressed in today's dollars); that is, half of the simulations show claims above $1.7 billion per year and half below. The mean level of claims (that is, the average claim) is higher, about $2.0 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 $3.5 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 $26.9 billion deficit in 2014 (in present value terms). This means that half of the simulations show either a smaller deficit than $26.9 billion, or a surplus, and half of the simulations show a larger deficit. The mean outcome is a $29.9 billion deficit in 2014 (in present value terms).

The median projected financial position is a larger deficit than shown in 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 the financial position of the singleemployer program eroding by $12.1 billion during 2004.

The accompanying graph 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 $49.8 billion and a 10 percent chance that PBGC could have a deficit of $10.7 billion or less. The probability of a surplus of any amount in 2014 is 2 percent.

Distribution of PBGC's Potential 2014 Financial Position

Graph of Distribution of PBGC's Potential 2014 Financial Position. This graph illustrates the distribution of possible financial outcomes for PBGC for the period from 2004 to 2014, based on 5,000 simulations conducted with PBGC's stochastic modeling system, the Pension Insurance Modeling System (PIMS). As shown by the graph, PIMS projects a median outcome of a $26.9 billion deficit in 2014 and a mean outcome of a $29.9 billion deficit. The standard deviation is $16.9 billion. There is a 5 percent chance of a deficit of $60.3 billion or more, a 10 percent chance of a deficit of $49.8 billion or more, a 25 percent chance of a deficit of $37.3 billion or more, a 25 percent chance of a deficit of $18.1 billion or less, a 10 percent chance of a deficit of $10.7 billion or less, and a 5 percent chance of a deficit of $5 billion or less. There is a 2 percent chance that there will be a surplus of any amount in 2014.

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