Based on the Pension Benefit Guaranty Corporation’s (PBGC’s) statutory authority to seek involuntary termination of a pension plan when it determines that the possible long-run loss to the PBGC may reasonably be expected to increase unreasonably if the pension plan is not terminated, the PBGC initiated its Early Warning Program (EWP) in 1993.
Under the EWP, the PBGC has focused on corporate transactions involving financially troubled companies, as well as companies with substantially underfunded pension plans. Informally, the PBGC has said that it monitors transactions by companies that are members of controlled groups with pension plans that in the aggregate (1) are underfunded by $50 million or more or (2) have 5,000 or more participants.
A 2000 Technical Update cites the following as examples of transactions that may attract PBGC interest:
- Controlled group breakup, including the sale of a subsidiary
- Transfer of significantly underfunded pension liabilities with the sale of a business
- Leveraged buyout
- Major divestiture by an employer that retains significantly underfunded pension liabilities
- Payment of extraordinary dividends
- Substitution of secured debt for a significant amount of unsecured debt
In recent years, the PBGC has targeted as many as 100 such transactions per year. When so doing, the PBGC typically will solicit a great deal of detailed information from the involved company about the transaction and the controlled group’s current and projected financial circumstances. Unless that information is very reassuring to the PBGC, it will generally try to extract concessions from the subject company that will limit the PBGC’s potential exposure in the event of a plan termination—such as additional cash pension contributions, letters of credit, security interests in controlled group assets, and guarantees by financially stronger companies leaving the controlled group.
Needless to say, the PBGC’s involvement in a transaction can be a considerable distraction. As such, the EWP update posted on the PBGC website in December 2016 attracted quite a bit of attention. That posting added the following to the 2000 Technical Update’s list of transactions targeted by the EWP:
- Significant credit deterioration
- Downward trend in cash flow or other financial factors
This strongly suggested that the PBGC would no longer even need a transaction in order to impose itself on a plan sponsor and its controlled group.
The reaction by the plan sponsor community, including a strong letter from the American Benefits Council, was spirited. The PBGC apparently heeded that reaction; it posted FAQs on its website in May assuring plan sponsors that EWP review would not be triggered absent a transaction. A mere change in a plan sponsor’s credit quality, for example, would not be sufficient. The PBGC also confirmed that its screening criteria ($50 million or more underfunding, or 5,000 or more participants—each on an aggregate controlled group basis) had not changed.
Given this recent guidance, the PBGC and its EWP, it seems, will be no more intrusive or distracting for companies than it has been for the past nearly 25 years. Stay tuned.