Congress smacks pension plans with PBGC premium increase

Corporate defined benefit plan sponsors are feeling picked on by Congress.

In order to reach a two-year federal budget deal and avoid another government shutdown, House and Senate negotiators agreed earlier this month to offset spending increases by raising PBGC premiums, increasing some federal employee retirement contributions and trimming cost-of-living increases for military retirees.

While federal employees marshaled their millions of members to lessen the sting of contribution increases, the corporations that will see premiums to the Pension Benefit Guaranty Corp. jump 50% by 2016 had little say, for several reasons.

Not typically shy when dealing with Congress, some corporations are keeping their powder dry for a major tax reform debate expected next year. There also is the perception on Capitol Hill that defined benefit pension plans are a dying cause — and therefore affect fewer constituents — which gave even ardent supporters in Congress little clout in the fast-moving budget negotiations.

Then there was the question of how to sell the deal to members of the House and Senate and to the public.

“If you start this process by saying you can't raise taxes, you've got to go to a fee,” said Howard Gleckman, resident fellow at the Tax Policy Center in Washington, a joint venture of the Urban Institute and the Brookings Institution. Companies paying PBGC premiums “got a target on their back simply because of the label,” he added.

“It's the PBGC piggy bank,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, which represents 120 of the largest U.S. corporate pension funds with more than $1.5 trillion in retirement plan assets. “We are very unhappy.”

Even PBGC officials, who did not request the increase, were unhappy with the budget compromise. “PBGC premiums have always been too low for PBGC to do its job,” said PBGC Director Josh Gotbaum. “But our most immediate challenge is with multiemployer plans, and Congress took no action on those.”

Plan sponsors thought they were done in 2012, when PBGC premium increases produced $9 billion in federal revenue — at least on paper — to pay for a highway funding bill known as MAP-21 and avoid a student loan cost increase. The new budget deal is projected to add $8 billion in revenue. “The (PBGC) per-participant charge is nothing but a fee to pay for other stuff,” said Mike Archer, senior consulting actuary with Towers Watson & Co. in Philadelphia. “This is in many regards an under-the-radar revenue raiser. It doesn't affect all companies and it doesn't affect individuals.”

Still, he said, “I didn't expect another one this quickly.”

As a result, PBGC premiums now loom as one of the largest costs of running a defined benefit plan, said Robert Collie, chief research strategist for Americas institutional at Russell Investments in Seattle. He calculates a plan with 2,000 members and a $10 million funding shortfall that paid $160,000 in 2012 will pay $280,000 in 2015 due to MAP-21. Under the budget deal, that jumps to $344,000 in 2015 and $408,000 in 2016.

Calculations by some CIEBA members show their own PBGC costs going from $8 million to $43 million in four years.

The prospect of paying a $64-per-participant premium in 2016 gives plan sponsors a big incentive to reduce the number of participants in their pension plans through lump-sum payments to terminated vested employees and annuity buyouts for retirees. Plans that also face new hikes in variable-rate premiums because of lower funding levels will find it worthwhile to increase their funded status, which then gets them in the right spot to lower the participant rolls.

“It's very hard to build a case for this particular premium increase, (which is) blatantly political,” said Mr. Collie. “There's something about this that will make people say "enough is enough.' You can only put so much on even the most dedicated plan sponsors.”

The premium hike doesn't directly affect companies today, “but it does affect the calculation (for derisking),” said Mr. Archer of Towers Watson — particularly now that funding levels have improved since January by an estimated 15% to 20%, based on a typical 60/40 equities/fixed-income portfolio, even without December results. “I think the expectation for next year is there will be more settlement activity. There is going to be a dramatic increase in lump sum” arrangements, especially among frozen plans.

“The ones that can afford to close their plans will,” agreed Ms. Forbes of CIEBA.

If that comes true, the budget deal could wind up causing greater harm to the PBGC by shrinking its premium-paying base of healthy companies.

“What they're doing is going to have some bigger consequences,” warned a corporate pension plan investment officer who declined to be identified. “Plans are going to say "I'm not willing to be taxed like this.' It's taxation without representation. You have to wonder whether people on the Hill really understand pensions.”

At the very least, said Mr. Archer, “I'm sure (budget negotiators) didn't factor in fewer participants.”

Another factor working against plan sponsors is that the Obama administration has backed PBGC premium increases, which gives the idea an increasingly rare bipartisan seal of approval.

“The frustrating thing is that (the Office of Management and Budget) is now looking at 2015 budgets,” said Ms. Forbes of CIEBA. “They need to keep it in mind that this is a voluntary system. Last year it was the transportation bill, this year it's the budget. Next year who knows what it's going to be?”

Federal employees know what it feels like to be targeted, said Tim Kaufman, spokesman for the American Federation of Government Employees, the largest federal employee union with 670,000 members.

“It was looking pretty bleak” at the start of budget negotiations, which started with having all federal employees pay more into their defined benefit system but ended with just imposing a hike on new hires, said Mr. Kaufman. “So it could have been worse.”

In addition to federal employee saviors on Capitol Hill, what helped, he believes, was how federal employees were hurt by the recent government shutdown. Bracing for the 2015 budget debate, Mr. Kaufman added: “We really think for the next time Congress needs to look elsewhere.”