The legislation will increase the fixed rate that all covered plans are required to contribute, as well as the variable rate for those plans whose funding level is below 100% on a Pension Benefit Guaranty Corporation basis. The following chart outlines the premiums going forward:
Dealing another significant blow to plans that spent most of 2013 on the rebound; sponsors would be remiss not to consider funding their deficits and liability exit strategies to reduce the number of plan participants.
Following the lead of 2012’s Moving Ahead for Progress in the 21st Century Act (MAP-21), this appears to be another attempt to fund the ailing Pension Benefit Guaranty Corporation. In reality, skeptics see it for what it is—an offset to Washington’s spending increases at the expense of the private pension marketplace. The increase is expected to raise $8 billion in additional premiums, but even the PBGC feels the action missed the mark.
2013 was a good year for private pensions and their sponsors. Most plans saw double digit funding level increases thanks to strong equity markets and rising interest rates. Accordingly, many plan sponsors turned to pension risk transfer (via lump sum offerings and annuitization) as a means for derisking and downsizing liabilities. With the new legislation projected to add 3% to 5% to a plan’s ongoing liability; expect to see more plans offset the increase by reducing their level of underfunding and their participant count.
Plan sponsors looking to avoid the increases are advised to weigh the cost of funding options (cash reserves, borrowing, and debt issuance) versus their current operating expenses plus the PBGC’s current variable and fixed premium levels—taking into account future increases. Sponsors should also consider the cost-savings generated by reducing the number of participants in the plan (reduced PBGC premiums, audit fees and administration) not to mention the risk reduction benefits of these measures.
Geoff Dietrich, vice president and pension risk transfer specialist at Dietrich Associates
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.© 2014 Dietrich & Associates, Inc.