Proposed PBGC Action. On November 23, 2009, the Pension Benefit Guaranty Corporation (the “PBGC”) proposed amending its regulations to eliminate reportable event waivers and extensions, add new information requirements and add two new reportable events. The intent of the changes is to give the PBGC the ability to collect additional information regarding qualified defined benefit plans and their sponsors so that it can more readily keep track of troubled plans and sponsors.
Impact on Credit Agreements. The impact on plan sponsors who require access to credit facilities from commercial banks and other institutional investors could be significant. Many credit agreements include certain ERISA representations, covenants and notice requirements that are based on the current reportable event waivers. If the waivers are eliminated, the opportunities for reportable events significantly increase and as a result, plan sponsors may (i) be prohibited from accessing lines of credit and other financial products due to their inability to make ERISA representations required as a funding precondition, (ii) be required to provide their lenders with notice of each reportable event and (iii) be in default of their credit agreements due to a breach of an ERISA covenant.
Affected Reportable Events. The following is a list of the reportable events that the PBGC proposes to eliminate waivers:
- Active participant reduction (post-event notice)
- Missed contribution (post-event notice)
- Inability to pay benefits (post-event notice)
- Distribution to substantial owner (post-event 4. notice)
- Change in contributing sponsor or controlled 5. group (advance notice1 and post-event notice)
- Liquidation (advance notice and post-event 6. notice)
- Extraordinary distribution or stock redemption 7. (advance notice and post-event notice)
- Transfer of benefit liabilities (advance notice and 8. post-event notice)
- Funding waiver application (advance notice and 9. post-event notice)
- Loan default (advance notice and post-event 10. notice)
Many of the above reportable events are mundane and typically of no issue to well-funded plans (e.g., active participant reduction, change in contributing sponsor or controlled group, transfer of benefit liabilities), however, with the proposed PBGC actions, these types of reportable events will have a definite impact on plan sponsors not only from a credit accessibility and liquidity perspective but from a reporting one as well. There are also a few reportable events where the elimination of waivers may have a minimal impact (e.g., liquidation, loan default and bankruptcy). In these instances, credit agreements will most likely have separate provisions relating to the liquidation or bankruptcy of the plan sponsor so the elimination of the reportable event will not necessarily create new issues.
New Reportable Events. The following are the two new proposed reportable events:
AFTAP under 60%. This proposed reportable event would occur when a plan’s adjusted funding target attainment percentage is less than or presumed to be less than 60% under certain circumstances.
Asset transfer to retiree health account or subsequent reduction in funding ratio. This proposed reportable event would occur under certain circumstances when a Section 420 of the Code transfer is made or if, after the transfer, the funded ratio falls below 120%.
From a reportable event perspective, the first proposed reportable event makes sense, because the PBGC wants to keep track of troubled plans and sponsors. However, the same rationale does not apply to the second proposed reportable event. With respect to Section 420 transfers, generally, only well-funded plans may make such transfers. There are very strict requirements that plans and sponsors must meet before making a transfer. If this action is finalized, plan sponsors with credit agreements may have to reevaluate the benefits of making this transfer.
Conclusion. While the PBGC has yet to finalize its proposed changes, we strongly suggest that qualified defined benefit plan sponsors who rely on credit agreements, should closely review them to determine the possible impact of the elimination of the reportable event waivers and to discuss with their lenders possible next steps.