Following the debate and approval of the Bipartisan Budget Act in recent weeks, sponsors of defined benefit plans are facing the unsavory prospect, yet again, of dramatic increases in Pension Benefit and Guaranty Corporation (PBGC) default insurance premiums.
This newly programed series of increases comes on top of the significant premium hikes plan sponsors have already had to absorb in recent years, says Cammack Retirement Group Managing Actuary Art Scalise. Under the terms of the bipartisan budget accord, PBGC premiums are expected to reach up to $78 by 2019, far higher than they were just a few years ago, and the increased cost has many plan sponsors looking, more and more desperately, for an exit strategy, he says.
The budget agreement provides that the single-employer fixed Pension Benefit Guaranty Corporation (PBGC) premium will be raised to $68 for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation after that. The variable rate premium would continue to be indexed for inflation, but would be increased by an additional $2 in 2017, and additional $3 in 2018, and an additional $3 in 2019.
Scalise says he has been in his role at Cammack for nearly three years, after spending 16 years working at Aon Hewitt, coming from the Aon side. Throughout that time the PBGC has slowly shifted from being perceived as an ally of the DB system to a major obstacle to its survival.
“It has undoubtedly become more difficult for plan sponsor clients to deal with PBGC premiums and requirements since I joined the industry,” Scalise tells PLANSPONSOR. “Especially in the market where I have had an opportunity to concentrate, which is health care systems, plan sponsors have become increasingly cash strapped. Right now they’re trying to figure out how to continue to fund their DB plan required contributions, which are also increasing on an annual basis. When you layer on the extra PBGC premiums each year, it’s taking a real toll on them.”
NEXT: Third time’s a charm
Scalise observes this is the third round of announced PBGC premium increases “in something like a four-year period.”
“What’s worse, each time the premium hikes are put forward, they’re presented as the solution that will finally get the PBGC system to be sustainable and prevent the need for further hikes down the road,” Scalise explains. Years of conflicting messaging have left plan sponsors skeptical and embittered, “and they are clearly worried about what has been going on. Heading into the last month when additional increases were announced, PBGC premiums were believed to have been capped for the foreseeable future. The constant changes leave sponsors with no idea about where the DB plan environment is going.”
Also troubling, Scalise says, is the PBGC decisionmaking doesn’t exactly line up with wider market indicators.
“Sponsors have been doing their best at funding the plans, and many are putting in more money than required by law in the interest of getting ahead of the PBGC premiums and in the interest of the health of the plan,” he says. “From that perspective, and when one considers where markets and interest rates are going, I think this latest news took a lot of people by surprise.”
Part of the problem, as with other federal agencies, Scalise says, is that thinking and decisionmaking at PBGC is too closely tied to the current, short-term fiscal and economic environment. For a lot of plan sponsors, and the PBGC by extension, the current environment indeed looks pretty dismal from an asset versus projected liability perspective. But, as Scalise observes, we also know markets have been at historically low interest rates for a long time, and that plans’ funded statuses will almost inevitably bounce back as interest rates climb.
“What’s going to happen when interest rates start to rise for real and the liability the PBGC is reporting starts to dwindle significantly?” he asks. “What happens if rates rise enough to get plans close to 100% funding, what are you going to do with any excess monies? Do they refund it? Do they give credits to the plans somewhat? We don’t know what they will do.”
NEXT: The industry agrees
On Tuesday The Pension Coalition—which represents the pension-related interests of financial industry associations and individual companies across all major economic sectors—sent an open letter to lawmakers and the PBGC echoing many of Scalise’s arguments.
The letter urges lawmakers and regulators “to protect job-creators, workers, retirees, and their retirement security by opposing any further increases in premiums paid to the PBGC by sponsors of single-employer defined benefit plans.” It argues the recent premium increases “come on top of nearly $17 billion in premium increases already imposed over the last three years. In that same time, Congress has almost doubled the flat rate premium from $35 per participant to $64 per participant. The variable rate premium has also tripled from $9 per $1,000 of underfunding to $30 per $1,000 of underfunding.”
Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee (ERIC), which is a founding member of the Pension Coalition, agrees that large employers have worked very hard in recent years and historically to create benefits plans that offer their employees the best options for their future.
“Increasing premiums only serves to hurt those employees and employers participating in defined benefits plans,” she says. “The most frustrating thing about this latest hike is that the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans.”
National Association of Manufacturers Director of Tax Policy Christina Crooks highlights the fact that businesses are clearly already struggling with PBGC premium increases enacted over the past few years, “with nearly half of that amount being paid by manufacturers.” The additional premium hikes in the budget deal equate to a tax on employers, she adds, diverting dollars away from funding participant benefits, creating jobs and growing the economy.
The letter also argues that counting increased PBGC premiums as general revenue for purposes of budgetary scorekeeping is inconsistent with good governance and does not strengthen the nation’s retirement system. By law, PBGC premiums go directly to the PBGC, not to the Treasury and can only be used to pay benefits to plan participants and beneficiaries.
Read the Pension Coalition’s letter on ERIC’s website here.