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INTRODUCTION

This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, provides a discussion of issues and proposals relating to the financial condition of the Pension Benefit Guaranty Corporation (PBGC). The Subcommittee on Oversight of the House Committee on Ways and Means has scheduled a public hearing on February 4, 1993, to review the impact of underfunded defined benefit plans on the PBGC, plan retirees, and plan sponsors.

Part I of the pamphlet is an overview. Part II discusses present law and background of the Federal pension insurance program and the financial condition of the PBGC. Part III describes present-law defined benefit plan funding requirements. Part IV describes certain proposals, including H.R. 298 ("Pension Funding Improvement Act of 1993"). Part V discusses issues relating to defined benefit plan funding and the financial condition of the PBGC.

'This pamphlet may be cited as follows: Joint Committee on Taxation, Issues and Proposals Relating to the Financial Condition of the Pension Benefit Guaranty Corporation (PBGC). (JCS3-93), February 3, 1993.

I. OVERVIEW

A defined benefit pension plan is a type of employer-sponsored retirement plan that provides benefits to participants based on a formula specified in the plan. To provide benefit security to plan participants, the Internal Revenue Code and title I of the Employee Retirement Income Security Act of 1974 impose minimum funding requirements on the sponsor of a defined benefit pension plan.

The minimum funding requirements provide employers considerable flexibility in determining the minimum required contribution, and permit benefits to be funded over a long period of time. Thus, it is possible that a defined benefit plan may be terminated at a time when plan assets are insufficient to pay promised benefits.

The Pension Benefit Guaranty Corporation (PBGC) was created in 1974 to protect plan participants in the event a defined benefit pension plan terminates with insufficient assets. The PBGC guarantees basic retirement benefits, up to a current dollar maximum benefit of $2,437.50 per month (for 1993).

In its most recent annual report (for fiscal year 1991), the PBGC reported a deficit of $2.5 billion. The PBGC finds that the defined benefit system as a whole is relatively healthy, but that certain single-employer pension plans, primarily in the steel, airline, tire, and automobile industries, are underfunded by about $40 billion, about $13 billion of which is in plans sponsored by financially troubled companies. The PBGC forecasts that, depending on the level of future losses, its deficit could increase to between $2.7 billion and $17.9 billion by the end of fiscal year 2001.

Despite recent changes in plan funding rules designed to increase the level of plan funding, there is concern that the risk of loss upon plan termination has increased. There is growing concern that funding rates may be too low and that current PBGC premiums may be insufficient to cover future liabilities. To deal with these concerns, policymakers are considering a number of changes to present law.

II. THE FEDERAL PENSION INSURANCE PROGRAM
A. Present Law and Background

Defined benefit pension plans

A defined benefit pension plan is a type of employer-sponsored retirement plan that provides benefits to participants based upon a formula specified in the plan. For example, a defined benefit plan could provide a benefit equal to a percentage of an employee's average compensation multiplied by the number of years of service with the employer. A defined benefit plan could also provide a flat dollar benefit based on years of service, or a specified percentage of final or average compensation. The key feature of such a plan is that the benefit promised is based on the plan formula, not on the investment experience of the plan.

In order to help ensure that the promised benefits are paid to plan participants, defined benefit plans are subject to minimum funding requirements under both the Internal Revenue Code (the Code) and title I of the Employee Retirement Income Security Act of 1974, as amended, (ERISA) which require the employer sponsoring the plan to make certain contributions to fund the plan. These requirements are discussed in detail below.

The PBGC

As enacted in ERISA, as well as under present law, the minimum funding requirements permit an employer to fund defined benefit plan benefits over a period of time. Thus, it is possible that a plan may be terminated at a time when plan assets are not sufficient to provide all benefits accrued by employees under the plan. In order to protect plan participants from losing retirement benefits in such circumstances, the Pension Benefit Guaranty Corporation (PBGC), a corporation within the Department of Labor, was created in 1974 by ERISA to provide an insurance program for benefits under most defined benefit pension plans maintained by private employers. According to the PBGC's latest annual report (for fiscal year 1991), the single-employer insurance program currently covers more than 32 million participants in more than 83,000 defined benefit pension plans.

Termination of underfunded pension plans

Prior to 1986, an employer generally could, subject to contractual obligations, terminate a single-employer plan at any time without regard to the financial health of the employer and without regard to the level of assets in the plan. If a single-employer plan was terminated with assets insufficient to pay benefits at the level guaranteed by the PBGC, the employer was liable to the PBGC for the

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