Tactics to cut pension plan risk reduce PBGC premiums and exposure

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PBGC Director Joshua Gotbaum acknowledges that “any departure from defined benefit plans reduces PBGC's premium base and weakens PBGC's financial position.”

Employers' accelerating moves to reduce their pension plan risk by offering to convert plan participants' monthly annuities to a cash lump sum or transferring the obligations by purchasing a group annuity are a double-edged sword for the federal pension insurance agency, benefits experts say.

On one hand, such actions will reduce the Pension Benefit Guaranty Corp.'s premium income, which helps pay benefits of participants in failed employer plans the agency has taken over.

Employers' base PBGC premium is determined by the number of people in their pension plans. The base premium, $35 per plan participant, is slated to rise to $49 per plan participant in 2014.

Plan participants that convert their monthly annuity to a lump sum are no longer in the pension plan and, thus, no longer are counted when the employer calculates its PBGC premium payment.

Similarly, employers that transfer their benefit obligations by purchasing an annuity from an insurer no longer count affected participants in their PBGC premium calculations.

On the other hand, these risk-reduction approaches reduce the PBGC's exposure to future plan takeovers.

“There is a trade-off: Reduced income vs. a reduction in exposure,” said Jason Richards, a senior consultant at Towers Watson & Co. in St. Louis.

PBGC Director Joshua Gotbaum acknowledges that “any departure from defined benefit plans reduces PBGC's premium base and weakens PBGC's financial position.”

The action Congress should take is to give the PBGC authority to set premiums based on the financial risk that plan sponsors pose to the agency, he said last week during a briefing. That would encourage employers to retain their pension plans, he said.

However, employer benefit lobbying groups, such as the American Benefits Council and the ERISA Industry Committee, have staunchly opposed such a change, arguing, among other things, that the PBGC lacks the expertise to set premiums.

Jerry Geisel is editor-at-large at Business Insurance , a sister publication of Pensions & Investments.