Indefinite Future for Defined Benefit Plans?

By: Rooster Research | Sun, Apr 10, 2005
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A sea-change has taken place in the last few years for the Pension Benefit Guarantee Corporation (PBGC). The PBGC was created by the Employee Retirement Income Security Act (ERISA) of 1974 to cover the pensions of those under private, defined benefit pension plans. The original mission was to charge premiums to sponsors of the pension plans in order to generate the revenue needed to cover claims.

This works, like everything else, in principle, under ideal conditions. In this case, the recent hit to the economy in the early 2000s, the lower return of the market since the boom's end and the decline, until recently, in interest rates has taken its toll on the PBGC. The legacy airlines' travails have crash-landed on the PBGC's books with the effect of causing a dramatic mismatch between assets and liabilities, while also blowing up the size of the PBGC's "Reasonably Possible Exposure" to an all time record high. (Reasonably Possible Exposure refers to the under funded plans associated with companies with speculative-grade bond ratings, aka distressed bonds, if things are really bad enough in our personal viewpoint.) More to come in future discussions, and we fear more to come for the PBGC, but also more, perhaps optimistically, for some distressed airline bond investors.


Rooster Research

Author: Rooster Research

Ed Moy
Rooster Research

This report's evolving market perspective is based upon a perceived structure to speculative activities - which we characterize as falling within four groups: trend, contrarian, arbitrage and expert-based. Trends are profitable for the momentum and trend player. At some point Contrarians have their moment in the sun and those who are "lucky" enough to come in, or have somehow timed their speculations successfully, make their money by fading the aging trend. About the same time sometimes an "arbitrage" is detected, based upon an assertion of an over-, or under-, valuation, or prices under, or above, historical mean prices and multiples, or an evaluation of an anticipated regulatory or corporate event, while "experts" and knowledge specialists, who waited for some confirmation, in quarterly, periodic or fundamental indicators begin to evaluate, publicize their opinions and findings, confirming the emergence of what evolves into a new trend. This new trend then picks up steam. It could emerge into a cyclical high or low, or a manic period, to be followed by a counter-cycle and/or reaction enjoyed by the next contrarians, and so on and so on. We disclose this evolving bias to our readers as a caveat. See

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