Moody’s: PBGC Likely to Go Broke by 2025

The Pension Benefits Guarantee Corporation (PBGC) could become insolvent in the next 10 years, Moody’s has warned.

The PBGC announced last week its multiemployer insurance program deficit is already through the roof, with shortfalls jumping by $10 billion to $52 billion for the year ending September 2015.

However, the credit ratings agency argued the planned premium increases to cover the climbing deficit would only exacerbate the problem, culminating with plan sponsors becoming unable to afford premiums, and the PBGC running out of money.

Moody’s reported that PBGC premiums, which have increased by nearly 340% over the last eight years, reduce sponsors’ annual free cash flow by more than $270 million.

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As a result, there is more than a 50% chance of insolvency by 2025, the PBGC estimated, with a 90% chance of becoming insolvent by 2031.

Moody’s labeled this deficit growth “credit negative” for plan sponsors, warning that it pointed to an overall worsening trend in multiemployer pension performance.

Russell Investments’ Chief Research Strategist Bob Collie also wrote last week that funded status for most corporate plans changed little in 2015—but that it is still “too soon” to gauge the impact of further increases to PBGC premiums.

The Committee on Investment of Employee Benefit Assets (CIEBA), however, has already labeled premium hikes a threat to both pensions and the PBGC itself.

“Raising the premium rates will only hurt the agency by forcing more employers to consider exiting the system,” said Deborah Forbes, executive director of CIEBA, earlier this month.

Following the recent passage of the federal budget deal, PBGC premiums for single-employer corporate pensions are set to increase to $68 per person for 2017. This increase will be followed by further hikes to $73 and $78 per person in 2018 and 2019, respectively.

The UK has today welcomed the latest entrant to the de-risking market: Scottish Widows.

The company, which is part of Lloyds Bank, sealed a £400 million ($604 million) buy-in with the Wiggins Teape Pension Scheme, insuring retired former employees of paper manufacturer Arjowiggins.

The transaction covers roughly two-thirds of the pension’s liabilities, Scottish Widows said. It made use of an “innovative premium payment process,” which allowed the pension to secure a price and pay it over “an extended execution period”.

Emma Watkins, director of bulk annuities at Scottish Widows, said the company had “worked closely with the trustees and their advisers to tailor the arrangement to meet the scheme’s needs”.

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Watkins joined Scottish Widows in June from consultant LCP to build the bulk annuity team. She told CIO in April that the company’s high-profile brand, as well as that of its parent company, would help with attracting clients.

“The relationship with Lloyds is clearly key,” she added. “With buy-ins and buyouts, trustees want to work with someone they and the corporate sponsor can be comfortable with.”