The Pension Benefit Guaranty Corporation (PBGC) introduced its Early Warning Program (EWP) in the early 1990s, but didn’t publish any guidelines or standards for the EWP until mid-2000, in Technical Update 00-3. While the guidelines and standards have evolved since that time, the PBGC has not provided any publicly available update to Technical Update 00-3.
The purpose of the EWP is to identify corporate transactions that, in the PBGC’s view, may increase its insurance program’s exposure by weakening employer financial support for underfunded pension plans. When the PBGC identifies such a transaction, it contacts the pension plan sponsor to try to negotiate additional measures to secure plan funding. These transactions typically have involved controlled group breakups (e.g., sale of a subsidiary or the assets of a financially strong business unit), with or without the transfer of an underfunded pension plan outside the controlled group; leveraged buyouts; payments of extraordinary dividends; or substitutions of secured debt for significant amounts of previously unsecured debt.
The PBGC generally uses publicly available information, such as press reports or SEC filings, to identify these transactions. The PBGC may also rely on information from Form 10 or Form 10-Advance, which plan sponsors are required to file at the occurrence of a statutory reportable event (such as a change in membership of a plan sponsor’s controlled group, a transfer of pension liabilities outside the controlled group, or payment of an extraordinary dividend).
In recent years, the PBGC has focused on transactions affecting pension plans with aggregate underfunding of $50 million or more (determined on the basis of conservative plan termination assumptions) or 5,000 or more participants. This has produced a universe of about 1,500 companies that the PBGC actively monitors. In 2014, however, a brief interest rate increase improved pension plan funding overall. This prompted the PBGC to lower its monitoring standard to $25 million in aggregate underfunding, thus maintaining its active monitoring universe at about 1,500 companies. The current interest rate environment may cause the PBGC again to adjust its monitoring criteria to maintain a stable universe of about 1,500 companies.
What sort of accommodations does the PBGC seek when it contacts a plan sponsor about a pending transaction?
The PBGC is generally open to negotiation and will consider a variety of forms of relief. These have included accelerated or additional contributions, letters of credit, escrows, guarantees by companies that will no longer be members of a pension plan’s controlled group, security interests, and even credit default swaps.
What is the PBGC’s statutory authority for the EWP, and what leverage does it have with uncooperative plan sponsors?
The PBGC has no specific statutory authority for its intrusion in legitimate corporate transactions, and its only leverage is involuntary termination of the affected underfunded pension plan(s). In order to exercise that leverage, the PBGC must convince itself—and a federal district court—that as a result of the pending transaction, “the possible long-run loss of the [PBGC] with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated.” That is a hefty standard that will likely be met in very few transactions, and involuntary termination is a remedy the PBGC has pursued on very few occasions.
In a controlled group breakup, for example, the PBGC’s goal—absent negotiated accommodations—is to hold all pre-transaction controlled group members financially liable for a pension plan’s underfunding when the plan terminates. To do so, before the transaction closes, it must
- determine through its own administrative process, conducted by its Trusteeship Working Group, that involuntary termination is warranted;
- notify all plan participants of its intent to terminate the plan, typically by publication in a newspaper with national circulation; and
- file a complaint in the appropriate federal district court.
This enables the PBGC to establish a pre-closing plan termination date that would hold all pre-transaction controlled group members financially liable. The PBGC has pursued this process in a handful of transactions, even where involuntary termination would not have been a legally viable option, in order to bring recalcitrant parties to the negotiating table.
In most transactions, the threat of the involuntary termination process, with its attendant disruption and delay, is enough to open a dialogue between the PBGC and the plan sponsor. Any plan sponsor that engages in such a discussion, however, is well advised to understand clearly the timing, process, tactics, and ultimately the statutory leverage that the PBGC will bring to the table.