PBGC Rates to Rise
ETCETERA
DB plan sponsors moving to evade mounting PBGC premiums.
By Leslie Kramer
Fed up with paying what they view as ‘unfairly high’ Pension Benefit Guar- anty Corporation (PBGC) insurance
premiums, defined benefit retirement plan
sponsors are looking to shore up their underfunded plans ahead of schedule to avoid or
reduce the costly fees. With the same goal in
mind, many plan sponsors are also increasing
the number of lump sum distributions they are
offering to participants and purchasing annuities to reduce their pension plan obligations.
According to the Mercer/CFO Research
2017 Risk Survey, “Adventures in Pension
Risk Management,” close to 80% of the 175
survey respondents said they are now contributing more than the minimum level of funding
to their DB plans in an effort to meet specific
funding ratio thresholds or to fully fund the
plan faster than regulations require.
The PBGC, the federal government’s insurance program for
private-sector pension plans, is on track to move its single-employer
program from a deficit of $21 billion to a surplus by the end of
fiscal year 2022, according to its FY 2016 Projections Report. “The
projected improvements to PBGC’s net position for the single-
employer program over the 10-year period are due to a general
trend of improving plan solvency and projected PBGC premiums
exceeding projected claims.”
PBGC premium rates are set by Congress. According to a
PBGC official “historically, the premium revenue has not been suffi-
cient to cover the cost when pension plans fail.” However, Congress
has recently been raising premium rates. For plan years beginning
in 2017, the variable-rate premium (VRP), which is assessed to spon-
sors of underfunded single-employer pension plans, is set at $34 per
$1,000 of unfunded vested benefits (UVBs), up from a 2016 rate of
$30. For 2018, it is set to rise to $38, and to $42 for 2019.
Plan sponsors are also frustrated by the fact that premiums
paid to PBGC are treated as part of the federal budget, which they
complain, ends up hurting DB plans. “When Congress makes changes
to premiums…some of those increases are motivated by the desire to
manage the deficit size of the US budget,” the PBGC official said. He
explained that legislators count income coming into the PBGC in the
form of premium payments as income to the federal budget.
But Congress is not authorized to use any of that money. That’s
why “there is a feeling that premium increases
have been a budget-closing technique for the
federal government,” said Rick Jones, retire-
ment and investment senior partner at Aon.
“We think it is not very good governance,” said Matt McDaniel, US Defined
Benefit Risk Leader, Mercer. “There was a bill
proposed that is still languishing in Congress
that we support that would essentially end
double counting of PBGC revenues.”
Lump Sum and Annuity
Payments Climbing
Lump sum distributions by plan sponsors
and the purchase of annuities to reduce
pension plan obligations are also on the
uptick. “Companies are taking the view that
it is a financial advantage to absolve themselves of premiums and administrative costs and the underlying
liability, so it’s not just due to lots of bankruptcy and distress—
financially healthy companies are seeking to better manage their
pension obligations,” Jones said.
Forty-three percent of respondents to the Aon Global Risk
Survey 2017, which in September surveyed 100 U.S. plan sponsors, say they have already implemented a lump-sum offer to former
employees, while 39% said they were somewhat or very likely to
implement this approach in the next 12 to 24 months.
The Future of the PBGC
Looking out over the next 10 years, “there will still be a high degree
of uncertainty with respect to the future of the single-employer
program,” according to the PBGC official. Problems could arise
for the agency if too many companies start removing liabilities from
the system due to high premiums. “The PBGC’s premium math of
future surplus only works if people stay in the pension system and
keep paying premiums,” said McDaniel. “If all the fully funded
plans look to terminate their plans, the PBGC will have a smaller
base, but then the unhealthy plans will be the problem.”
For the time being, that doesn’t seem likely. According to the
Aon report, just 6% of US corporate pension obligations have been
settled since 2012. “There are still lots of pension obligations that
plan sponsors are managing, while opportunistically looking for
ways to decrease their pension foot print,” Jones said. —CIO
“When Congress
makes changes to
premiums…some
of those increases
are motivated
by the desire to
manage the deficit
size of the US
budget.”
