SINGLE-EMPLOYER PROGRAM EXPOSURE

The Employee Retirement Income Security Act requires that the PBGC annually provide an actuarial evaluation of its expected operations and financial status over the next five years. The PBGC historically has extended these forecasts to cover ten years.
The PBGC’s “expected claims” are dependent on two factors: the amount of underfunding in the pension plans that the 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. The financial health of a plan sponsor is reflected in factors such as whether the firm has a below-investment-grade bond rating. The amount of underfunding for plans of these financially weak companies is based on the best available data, including the annual filings that certain companies with underfunded plans are required to make to the PBGC under Section 4010 of ERISA.

For purposes of its financial statements, the PBGC classifies the underfunding for vested benefits in the plans 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, 2005, as disclosed in Note 7 of the financial statements, was $108 billion (valued using data as of December 31, 2004), compared to $96 billion for fiscal year 2004.

Methodology for Considering Long-Term Single-Employer Program Claims
No single underfunding number or range of numbers is sufficient to evaluate the PBGC’s exposure and expected claims over the next ten years. Claims are sensitive to changes in interest rates and stock returns, overall economic conditions, contributions, changes in benefits, the performance of some particular industries, and bankruptcies. Large claims from a small number of terminations characterize the Corporation’s historical claims experience and are likely to affect the PBGC’s potential future claims experience as well.

The 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 the PBGC’s Pension Insurance Data Book 1998, pages 10-17, which also can be viewed on the PBGC’s Web site at www.pbgc.gov/publications/databook/databk98.pdf.)
PIMS starts with data on the PBGC’s single-employer net position (a $22.8 billion deficit in the case of FY 2005) 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 $1.4 billion per year (expressed in today’s dollars); that is, half of the simulations show claims above $1.4 billion per year and half below. The mean level of claims (that is, the average claim) is higher, about $1.7 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 $3.1 billion per year. PIMS then projects the 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 $21.8 billion deficit in 2015 (in present value terms). This means that half of the simulations show either a smaller deficit than $21.8 billion, or a surplus, and half of the simulations show a larger deficit. The mean outcome is a $23.8 billion deficit in 2015 (in present value terms).

The median projected financial position is a smaller 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 primary reason for the decrease in the projected deficit is the newly enacted increase in the PBGC flat premium rate, from $19 to $30 per covered participant with the $30 being indexed to future changes in the National Average Wage Index. An additional factor is the increase in the interest rate used to value liabilities.

The accompanying graph illustrates the wide range of outcomes that are possible for the 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 larger than $44.9 billion and a 10 percent chance that the PBGC could have a deficit of $4.3 billion or less. The probability of a surplus of any amount in 2015 is six percent.

 

PERFORMANCE AND ACCOUNTABILITY REPORT [PAR dated 11/15/05 to be included]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENT REPRESENTATION
FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
ACTUARIAL VALUATION
REPORT OF THE INSPECTOR GENERAL
REPORT OF INDEPENDENT AUDITORS
ANNUAL PERFORMANCE REPORT
FINANCIAL SUMMARY

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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