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CBO Anticipates $90B Price Tag for PBGC Special Financial Assistance

Government Affairs

The Congressional Budget Office (CBO) expects that the Pension Benefit Guaranty Corporation (PBGC) special financial assistance (SFA) program will cost $90 billion in the coming decade. 

The projection is contained in a report the CBO sent to Rep. Virginia Foxx (R-NC),  Ranking Member of the House Education and Labor Committee, and Rep. Jason Smith (R-MO), Ranking Member of the House Budget Committee, in response to their request for information on the final rule it issued on the program. The PBGC had issued that final rule on July 7, 2022, setting forth the requirements for SFA applications and related restrictions and conditions in accordance with the American Rescue Plan Act of 2021 (ARPA) enacted in March 2021. 

The CBO based its initial estimates concerning the SFA on its expectations that the PBGC would implement ARPA. The interim final rule that the PBGC issued in July 2021 was consistent with those expectations. 

The Final Rule

The final rule made a variety of changes to the interim rule,  which the CBO outlined in the letter to Foxx and Smith. Highlights of those changes include the following. 

Computations. The final rule changes the method used to compute SFA, including the assumed rate of return. It also changed the type of assets in which pension plans may invest SFA, which changes the expected rate of return and the risk profile of those investments. 
In February 2021, the CBO  projected SFA costs in an estimate for the House Committee on Ways and Means’ reconciliation recommendations. It had used a single discount rate in those projections and in subsequent baseline projections. The PBGC specified a single rate in the July 2021 interim final rule. 

In the final rule, the PBGC revised the SFA computation method, the CBO notes. The rule directs use of a projection approach that accounts for estimated assets in each year through 2051. Qualifying pension plans will now receive the minimum amount of SFA necessary to end each plan year through 2051 with zero or positive assets. 

The final rule also changed the interest rate used for SFA computations, which the CBO says results in a higher total amount of assistance. ARPA specified the interest rate to be used to determine the amount of assistance. In the interim final rule, the PBGC concluded that that it did not have the authority to allow plans to use “a different rate or bifurcate the statutorily mandated interest rate,” but in the final rule, it concluded that it could permit a different rate for SFA assets, provided that plans used the required rate for non-SFA assets.
 

Investments. The July 2022 final rule also allows pension plans more flexibility in investing the SFA they receive, the CBO says, which it expects will result in higher expected investment returns and in additional investment risk. With higher SFA amounts and higher expected investment returns, the CBO says, it expects that plans will remain solvent for a longer time than they would have under the interim final rule. However — the CBO adds that its SFA estimate is unaffected by the expected return or the investment risk on actual plan investments, because the SFA is computed based on specified rates of return.

Providing Additional Benefits to “MPRA Plans.” The July 2022 final rule increases the amount of special financial assistance given to pension plans — often called MPRA plans — that suspended benefits under the Multiemployer Pension Reform Act of 2014. Although those plans have been allowed to reduce benefits to avoid insolvency, they must reinstate benefits in order to qualify for SFA.

Under the final rule, MPRA plans receive “the greatest of: (1) the amount of SFA calculated for a plan that is not a MPRA plan [the standard calculation described above]; (2) the lowest amount of SFA that is sufficient to ensure that the plan will project rising assets at the end of the 2051 plan year; and (3) an amount of SFA equal to the present value of reinstated benefits.” 

Effects of the Final Rule

The CBO told Foxx and Smith that it expects the final rule will have the following effects.  

SFA Amounts. It anticipates that the changes in the final rule will increase the total amount of SFA that plans will receive. It estimates that the amount of assistance will total $90.4 billion during 2022-2032 period — which is $4.5 billion, or 5% — more than the $85.9 billion estimated in CBO’s May 2022 baseline budgetary projections, which were based on expectations consistent with the July 2021 interim final rule.

Plans Receiving SFA. It anticipates that the final rule will increase the number of pension plans receiving SFA. Under its May 2022 baseline — which used the specifications in the interim rule, 333 pension plans would receive SFA in at least one of the 500 simulations, and 203 would receive assistance in at least half of the simulations. Using those baseline projections and the specifications in the final rule, says the CBO, 336 plans would receive assistance in at least one of the 500 simulations, and 213 would receive it in at least half of the simulations.

Effects on Plan Assets and Liabilities. The CBO projects that with (1) larger SFA amounts and (2) higher expected investment returns under the final rule, on average, plans will have more assets, but their gross liabilities will not change.