Pragmatic Strategies to Reduce PBGC Premiums This Year

Pension plan sponsors have taken various actions to reduce their PBGC premiums in the last year, resulting in a decline in premiums paid in 2018 of $1.2 billion.

October Three Consulting’s third annual PBGC Premium Burden Survey shows U.S. pension plan sponsors paid $1.2 billion less in insurance premiums to the Pension Benefit Guaranty Corporation (PBGC) in 2018 versus 2017.

This is despite the fact that PBGC premiums continue to increase. According to October Three’s survey report, the drop in premiums paid can be tied to record levels of voluntary contributions made for 2017, strong 2017 asset performance, continued headcount reduction via lump sum and annuity settlements, and increased adoption of best practices related to timing and recording of plan contributions.

However, the report also points to some $60 million in “unnecessary payments” doled out by plan sponsors to the PBGC last year.

“While many sponsors have taken big steps to reduce premiums, hundreds of plans continue to leave easy money on the table,” the report says. “Our analysis indicates close to $60 million in premiums could have been saved in 2017, and over $500 million between 2010 and 2017, by adopting very modest changes to contribution timing and recording.”

According to October Three’s analysis, when including large voluntary year-end contributions in the calculation, missed premium savings between 2010 and 2017 total $1.2 billion.

“Our analysis includes an industry focus on hospitals and utilities, two industries in which failure to adopt best practices have been particularly costly,” the report says. “Pension sponsors in these industries have much more to gain from adopting simple best practices than a typical employer.”

October Three’s data suggests the total of approximately $5.5 billion in PBGC premiums paid last year fell a sharp 18% from the 2017 figure of roughly $6.7 billion. Comparing flat versus variable rate premiums, the report shows the flat rate premiums more than doubled between 2009 and 2018 (from $34 to $74 per participant), and thus the median plan saw its flat rate premiums paid double as well (from $42,000 in 2009 to $85,000 in 2018). On the variable side, October Three says, the last two years have seen a decrease, with a sizable decrease in 2018 “due mostly to better funded plans.”

“Other variables like employer contributions, benefit accruals and capital market fluctuations affect the variable rate premium,” the report says. “Since 2009, there has been more than a fourfold increase in the variable rate (from 0.9% in 2009 to 3.8% in 2018), while the median variable rate premium paid has similarly increased by more than four times (from $16,000 to $67,000). On a cautionary note, with most plan sponsors experiencing poor asset performance in 2018, we expect to see 2019 variable rate premium move higher.”

With such factors in mind, the survey report anticipates the level of PBGC premiums paid overall will jump back up in 2019, “due to a combination of poor 2018 asset performance and relentless increases in premium rates—headcount premiums increasing from $74 to $80 and variable premium rates increasing from 3.8% to 4.3% in 2019.”

Missed opportunities for PBGC savings

“Minimizing PBGC premiums depends on plans maximizing the use of ‘grace period’ contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year,” the survey report says. “This is what we call best practices. Failure to adopt best practices around quarterly contribution requirements and applying funding balance has caused plan sponsors to pay higher PBGC premiums than necessary, due to not maximizing and getting full credit for grace period contributions.”

According to October Three’s research, in many cases, all or part of contributions made to satisfy quarterly contribution requirements could have been characterized as grace period contributions but simply were not.

“So, plans often report lower asset values than they could have—and, as a result, pay higher premiums than they need to,” the report says. “Beyond fixing recording errors, best practices involve modest acceleration of pension contributions to minimize PBGC premiums.”

In particular, October Three recommends (for a calendar year plan that was at least 80% funded in the prior year) the following considerations: accelerating quarterly contributions due on October 15 to September 15 and recording those contributions for the prior year; accelerating residual contributions due on September 15 to April 15, which allows plans to record April 15 and July 15 contributions for the prior year; accelerating quarterly contributions due on January 15 to September 15 and recording those contributions for the prior year; accelerating voluntary year-end contributions to September 15 and recording those contributions for the prior year.

“The accelerations above are modest, from as little as one month to five months at the most, and, other than voluntary year-end contributions, these contribution amounts are usually known months in advance,” the analysis says. “But the payoff to plan sponsors could be huge. Our analysis indicates that failure to adopt these best practices has caused plan sponsors to pay $1.2 billion more in premiums between 2010 and 2017 than they needed to.”

The report suggests accelerating October 15th contributions to September 15th is the easiest first step, calling this “a mere one-month acceleration that produces a near-instant 4.3% rebate.” Further, according to the report, for some employers, accelerating required September 15th contributions to April 15th can significantly reduce premiums by freeing up April 15 and July 15 contributions to be recorded for the prior year. And, “accelerating required January contributions to the previous September is very much like the October acceleration, except that it involves bringing forward a contribution by four months rather than one.”

Hospitals and utilities need particular attention

The October Three survey report goes on to suggest that simple acceleration strategies could have saved hospitals another $8.1 million in 2017, for total missed savings in the hospital industry of $13.5 million. This represents 25% of total missed savings for the U.S. pension plan universe tracked by October Three’s analysts. Given that hospitals are only 15% of plans in the “eligible” universe, this underscores how relatively valuable adopting best practices would be for the hospital industry, the report says.

“Utilities are less affected, but recall that comparatively few utilities are ‘eligible’ to adopt best practices to reduce PBGC premiums,” the report points out. “Also, the historical pattern of missed savings for utilities is declining since 2010, like the pattern for our universe. However, total missed savings for utilities have crept up since 2014, and the increase is almost entirely due to increased recording errors, which have totaled $12.9 million during 2015 to 2017, including $4.5 million in 2017. This is 25% of all recording errors for our universe, for an industry comprising just 2% of the universe of eligible plans.”

Together, hospitals and utilities missed $9.9 million in premium savings due to recording errors in 2017, the report says, representing 54% of total recording errors for the eligible universe.

View the full PBGC Premium Burden Survey results here.