EA18 (8) Highway to PBGC Premium Explosion

Per Pension & Investments:

Sharply higher Pension Benefit Guaranty Corp. [PBGC] premiums resulting from the new federal budget deal will push more employers to shrink or terminate their defined benefit plans, moves that also will further erode the agency’s shaky finances, industry observers said.

Two session at the 2018 Enrolled Actuaries meeting touched on that subject.

In Session 101 – Late Breaking Developments Kent Mason of Davis & Harman LLP, a lobbying firm, had this to say (according to my notes which my comments in brackets):

Skyrocketing PBGC premiums are the catalyst of what will be a serious erosion of the PBGC premium base. The folks left in the system would be those who can’t afford to transfer risk (ie borrow to fully fund their plan and then terminate it). PBGC is paying all payouts from premiums and could easily reduce premiums and stave off not having any premiums in the future.

The Kelly/Kind bill that would return premiums to 2016 levels for small plans (under 500) is being held up as large employers are looking for the same break.

Then at session 905 – PBGC: Update and Dialogue for Single-Employer Plans the final audience question was about exorbitant PBGC premiums and the PBGC representative responded:

The PBGC single-employer program does not have a surplus. Kent Mason’t comments were slanted. He is a lobbyist.

In questioning the PBGC representatives after the session I was informed of the genesis of these PBGC premium hikes going back to a 2012 highway bill where:

Under current law, employers that sponsor defined benefit plans are required to pay a fixed-rate premium to the Pension Benefit Guaranty Corporation (PBGC) equal to $35 per participant per year (indexed for inflation) and a variable rate premium equal to $9 per $1,000 in underfunding (not indexed for inflation). There is no limit on the variable rate premium. Multiemployer plans must pay premiums equal to $9 per participant, indexed for inflation.

The bill would: (1) adjust the variable premium for inflation beginning in 2013, (2) set a maximum variable premium of $400 beginning in 2013, (3) increase the variable premium by $4 in 2014 and by an additional $5 in 2015, (3) increase the fixed rate premium by $6 in 2013 and by an additional $7 in 2014, and (4) increase the multiemployer premiums by $2 beginning in 2013.

The PBGC interest rate provision is estimated to save $10.575 billion (including interactions with the interest rate stabilization provision) over ten years.

Those PBGC premiums have risen steadily and in 2018 for single-employer plans they are up to a flat-rate premium of $74 plus a variable-rate premium of $38 per $1,000 of unfunded vested benefits (with liabilities calculated using PPA-level low interest rates) with a cap (on the variable-rate premium) of $523 times the number of participants. These are usurious charges that are driving Defined Benefit Plans to termination….all because the federal government needed to boost the economy after a recession and, due to a misguided rule, had to pretend to find additional revenue (that may not materialize) to pay for those highways.

 

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