PBGC Removes Change in Credit Quality as Possible Trigger for Early Warning Program Review

The Pension Benefit Guaranty Corporation (PBGC) in early May clarified guidance issued in late 2016 about its Early Warning Program (EWP), explaining that the program had not been expanded and such a review for an employer’s defined benefit (DB) retirement plan would not be triggered solely by a change in credit quality.

Defined benefit retirement plan

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In the December 2016 guidance, the PBGC added for the first time a company’s credit deterioration or a downward trend in its financial metrics such as cash flow as possible triggers for an inquiry under the EWP.

“In other words, while historically PBGC focused on transactions or events, the December guidance included trends in the list of risk identification factors,” said a May 11 client bulletin from Groom Law Group.

Concern About More Scrutiny

This change caused consternation and questions from the DB retirement plan community, which perceived the PBGC to be widening its net and adding more scrutiny of companies with pensions, even if the company was considering a corporate transaction or conducting business as usual.

The PBGC on May 10 updated its webpage on risk mitigation and the EWP, removing credit deterioration and a downward trend in company financials as risk identification factors. A frequently asked questions (FAQ) webpage was posted at the same time by the agency that said, “change in a plan sponsor’s credit quality does not trigger an Early Warning Program review.”

Yet the agency made it clear that it usually considers a company’s credit quality along with factors such as plan funding in its analysis of a plan that may be showing early warnings of distress. If the plan sponsor has a good credit rating or a potential transaction will not result in a credit rating downgrade, it is less likely that the PBGC will contact the sponsor about the transaction, the FAQ said.

The updates were made in response to stakeholder feedback showing confusion about how the EWP works and when the PBGC is likely to contact plans about an investigation. Although it stated that the update did not change the EWP, the agency said it was intended to “increase transparency to the process,” as well as expand the description of the program, and replace outdated references to pension law and terminology.

The FAQ also clarified that the PBGC applies plan participant count and underfunding monitoring criteria on an aggregate controlled-group basis, rather than plan-by-plan. It continues to focus its monitoring on large plans with underfunding of $50 million or more or 5,000 or more participants.

Existing Watch List

The EWP still includes the following factors in its early warning signs for at-risk company DB plans:

  • A change in the group of companies legally responsible for supporting a pension plan (known as a controlled group), including a spin-off of a subsidiary;
  • A transfer of significantly underfunded pension liabilities related to the sale of a business;
  • A major divestiture by an employer that retains significantly underfunded pension liabilities;
  • A leveraged buyout involving the purchase of a company using a large amount of secured debt; or
  • The payment of a very large dividend to shareholders.

Use of Section 4010 data

The FAQ also said the agency does not use information provided by plans in filings under Section 4010 of the Employee Retirement Income Security Act to open reviews or to trigger an EWP review.

The PBGC further said in the FAQ that the EWP “helps premium payers [in other words, affected DB plans] by avoiding or mitigating loss.”

“It should be encouraging to plan sponsors that PBGC disclaimed any prior expansion of the Early Warning Program,” the Groom Law Group bulletin said. “However, … sponsors should expect PBGC to continue to pursue Early Warning Program investigations in the context of corporate transactions ….”

The federal pension insurance agency has for more than 20 years monitored corporate transactions and events through its EWP. It said its experience has shown that it can avoid terminating a pension plan by working with the plan sponsor to obtain protections before a business transaction significantly increases the risk of loss.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.