WWW: PBGC Premium Hikes Would Hit Strong Companies Hardest

May 12, 2005 (PLANSPONSOR.com) - Insurance premiums that financially healthy companies pay to the Pension Benefit Guaranty Corporation (PBGC) would increase by more than twice those of their weaker counterparts under the Bush administration's pension reform proposal.

>That was a key conclusion of a new Watson Wyatt Worldwide analysis of pending defined benefit system reform proposals, according to a news release.

>The administration’s proposal, announced earlier this year (See  Chao Releases Administration DB Reform Proposal ), is designed to ensure that employers keep pension benefit promises and to protect the PBGC from a taxpayer bailout, according to officials.  The proposal would overhaul pension funding rules and restructure premiums that employers pay to the PBGC. 

>Currently, all single-employer pension plans pay a flat rate PBGC premium, although employers with “severely” underfunded plans may also pay a variable premium.  Under the proposal, all employers with pension plans would see the flat rate premium increase.  Companies with underfunded plans would also pay a variable premium based on the total dollar amount of the underfunding.  In addition, a company with a below-investment-grade credit rating would be deemed “financially weak”   and would face stricter requirements than a “financially healthy” company. 

>The Watson Wyatt analysis of 471 Fortune 1000 companies with defined benefit plans shows that the actual effect of the proposal would be to disproportionately increase the financial burden on healthy companies compared with their weaker counterparts. 

>Healthy companies would see their total PBGC premiums (variable plus fixed) increase 240% under the proposal, more than double the 113% increase for financially troubled employers.  The analysis defined financially troubled employers as those having a below-investment-grade bond rating. Of the companies studied, 106 had below-investment-grade bond ratings.

“While the pension funding environment desperately needs fixing, we believe that the administration’s proposal will likely damage an already weakened defined benefit system,” said Sylvester Schieber, US benefits practice director at Watson Wyatt, in the announcement. “The proposal offers little incentive for companies without a pension plan to set one up.  Even worse, the added burden placed on healthy companies might lead them to terminate their pension plans.”

>Schieber notes that the proposed PBGC variable premium structure does not parallel how most insurance premiums are structured.  For example, just as healthy or low-risk individuals pay lower premiums for medical insurance coverage, financially healthy companies should pay lower premiums. 

>A copy of the analysis is available  here .  A free registration is required.