The Pension Benefit Guaranty Corporation (PBGC) is a self-funded federal program that was established to insure 58,000 pension plans. When a company fails to provide the pension benefits it promised to its retired workforce, PBGC intervenes and guarantees "core" pension benefits to these workers. Due to the trend of corporate restructuring in the 1980s PBGC found itself in a weak financial condition. In response, the program took on a new, proactive enforcement role, seeking to identify benefit plans that were underfunded and at risk of becoming a liability.
The new role, in the guise of the Early Warning Program, monitors corporate transactions for the possible effects they might have on existing pension benefits. When losses are determined to be unavoidable, (such as corporate bankruptcy), the program intervenes in order to manage and reduce these losses in an effort to reduce the ultimate cost to PBGC. The Early Warning Program also actively monitors those corporations whose pensions are currently underfunded by $25 million, PBGC's predetermined threshold for dangerous liability.
When a transaction that could threaten a pension is identified, the program initiates active negotiations with all parties. As it is PBGC's goal to achieve a negotiated settlement that will support existing pension plans, their greatest negotiating strength lies in their ability to declare a termination: a declaration that requires the corporation to fully fund the pension plan immediately. The cost of a termination creates a powerful incentive, for it can threaten a company's future viability and very existence. Another negotiating strength is PBGC's ability to expedite approval of corporate transactions through other government agencies.
For instance, in November of 1993, General Motors approached the PBGC because they were interested in selling a subsidiary. The subsidiary had a greater net worth than the underfunding in GM's pension plan, then $20 billion. Having recently witnessed PBGC's intervention with a Chrysler transaction, GM initiated negotiations hoping to "fast track" their transaction. The Early Warning Program had already prepared the PBGC negotiators in advance of contact with GM. As a result, the PBGC was prepared to negotiate immediately and their negotiations resulted in a win for all sides. GM made provisions for $10 billion in contributions to its underfunded plans, and the PBGC expedited the transaction's review by the IRS and other agencies.
Since its creation, the Early Warning Program has negotiated 24 settlements that have resulted in $13 billion dollars contributed to underfunded plans. Nearly 1 million participants have been protected by these negotiations. These savings represent what might have become future liability for PBGC, and so represent a savings in premiums for other corporations and their pension plans.
The Early Warning Program's effort to reduce their own liability created a system that encourages corporate compliance and voluntary disclosure. Although The Early Warning Program represents a common business model in its focus on loss prevention, the outcome of private sector transparency, and honesty in corporate accounting, makes the program truly innovative. In the future, the Early Warning Program hopes to increase its staff to that it may lower the threshold for potentially dangerous liability and protect an even greater number of workers in their retirement.