The Pension Benefit Guaranty Corporation (PBGC) has long maintained an Early Warning Program that monitors corporate transactions and events that the agency believes could adversely affect the funding of defined benefit (DB) plans. In December 2016, the PBGC updated its website overview of the program and added two events to the longstanding list of monitored transactions: credit deterioration, and a downward trend in cash flow or other financial factors.
Other listed transactions or events that may trigger PBGC scrutiny include a change in controlled group, a major divestiture by an employer that retains significantly underfunded pension liabilities, a leveraged buyout involving the purchase of a company using large amounts of secured debt, a substitution of secured debt for a significant amount of unsecured debt and the payment of a very large dividend to shareholders.
The agency assesses the impact of the early warning factors based on the employer’s financial and operational ability to support its pension promises. The Early Warning Program identifies roughly 300 transactions a year that, in the agency’s view, warrant a request for additional information. More in-depth reviews are conducted in about 100 of those cases.
In some cases, the PBGC seeks financial protections for plan participants and itself, such as requiring the plan sponsor to make additional plan contributions. It might also try to obtain financial protections in the form of a letter of credit or security interest in specific company assets in favor of the PBGC, or a standby guarantee by an affiliated entity to assume the plan or pay its unfunded liabilities if the sponsor fails to do so. The PBGC also uses its authority to involuntarily terminate certain “risky” plans as leverage to encourage sponsors to make these concessions. The agency says that it seeks these protections in an average five cases a year — less than 2% of monitored cases in a given year.
New early warning program criteria
It now appears that either a lower credit rating or a cash flow (or other financial factor) downturn may subject a DB plan sponsor to a PBGC inquiry, even without involvement in any of the corporate transactions listed above. Plan sponsors and their advocates have criticized these new events as being too vague. There are also concerns that these factors may result in more forcefully sought financial concessions from companies that can ill afford them.
The PBGC claims that it has always used similar criteria as part of its screening process. While earlier guidance from the agency indicated that it focused on “financially troubled” companies, that guidance also suggested that the PBGC would not act on that basis alone.