Pension Pressure Reduced - Good News For Corporate Valuation

Implications: The reduction of the PBGC's deficit reduces pressure on Congress to take action that could impact corporate values.   Such action would most probably hurt corporate value by adversely affecting cash flow and risk.

Analysis: The Pension Benefit Guaranty Corporation (PBGC) has been running a deficit for a number of years.  Although there is no immediate liquidity crisis in the PBGC, long-term solvency is an issue.  To make sure the PBGC is solvent, Congress has taken actions to relieve this pending crisis (i.e., Pension Protection Act of 2006).  If the PBGC deficit continued to grow, Congress would be forced to do one of the following:
1.    Subsidize the PBGC through taxes, etc.
2.    Increase premiums for covered pension plans/firms.
3.    Increase the power of the PBGC to levy fines, liens, etc on firms with under funded defined benefit plans.

The first alternative is the least attractive to Congress.  This leaves the last two alternatives.  Both would negatively impact the cash flows and risk of firms with defined benefit plans.

The bottom line is simple.  This reduction in the PBGC is good news for firms with defined benefits plans.