The Pension Benefit Guaranty Corporation’s Valuation Regulation in Bankruptcy: Entitled to Chevron Deference or Arbitrary and Capricious?
U. Penn. Journal of Business Law, Vol. 20, Issue 2 (2018)
39 Pages Posted: 20 Oct 2017 Last revised: 5 Oct 2018
Date Written: October 19, 2017
The Pension Benefit Guaranty Corporation (“PBGC”) is the federal agency charged with administering the insurance program for U.S. private-sector, defined-benefit pension plans protected under the Employee Retirement Income Security Act of 1974 (“ERISA”). In the event of a termination of such a pension plan, the PBGC, which takes control of the plan’s assets and is responsible to make payments to pensioners subject to a statutory cap, is empowered by statute to bring a claim against the sponsor of the terminated plan for any shortfall in plan assets, known as unfunded benefit liabilities. In 1975, the PBGC adopted a regulation pursuant to which it calculates this amount, prescribing assumptions as to mortality and retirement, as well as the discount rate to be applied to discount future payments to present value (the “Valuation Regulation”).
The PBGC derives the low discount rates used in its Valuation Regulation from a survey of the prices offered by insurance companies for annuity contracts. The problem, however, is that the PBGC neither buys annuities to meet its pension obligations nor does it have an investment profile or capital position similar to an insurance company. Instead, the PBGC has long employed a sophisticated and diversified investment strategy yielding average annual returns of around 8 percent — far in excess of the annuity-based discount rate found in the regulation. The result is that the PBGC, which generally asserts its claim for unfunded benefit liabilities in bankruptcy proceedings, has been permitted to assert claims that significantly overstate the amount needed for the PBGC to meet the future pension obligations at issue, much to the detriment of all other similarly situated creditors, none of whom are permitted the unilateral right to dictate their own discount rate divorced from market realities.
This Article presents an argument that the Valuation Regulation’s use of annuity pricing is arbitrary and capricious because it systematically overvalues the PBGC’s claims by applying an unreasonably low discount rate to future pension payments. In addition to violating fundamental principles of bankruptcy law and policy — including the principle that similarly situated creditors be treated equally — the PBGC’s use of annuity pricing to calculate its discount rate is directly at odds with the PBGC’s own rationale for the Valuation Regulation put forward in the Federal Register during the notice-and-comment rulemaking process. As stated by the PBGC as early as 1975 and as recently as 1993, the rationale for the Valuation Regulation is that the amount of the PBGC’s claim should be based on the PBGC’s own costs in providing the pension benefits. This traditional definition of a damages claim makes sense, as the only purpose of the PBGC’s right to collect a unfunded benefit liabilities claim is to allow it to pay out future pension benefits. The annuity-based interest factors currently used in the Valuation Regulation, however, significantly overstate the cost to the PBGC of providing these pension benefits, thus resulting in an artificially low discount rate, which in turn results in an artificially high bankruptcy claim.
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