PBGC Rates to Rise

Fed up with paying what they view as ‘unfairly high’ Pension Benefit Guaranty 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 sufficient 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 sponsors 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, retirement 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.