Sharply higher Pension Benefit Guaranty Corp. 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.
The budget deal approved by the House Oct. 28 and by the Senate Oct. 30 would raise PBGC premiums by more than 40% over the next four years, coming on top of multiyear increases already added as part of a 2013 budget pact.
These latest rate increases, if approved, would raise premiums from to $80 in 2019 from $64 per participant in 2016 both up from the 2015 rate of $57. Variable-rate premiums of $30 per $1,000 of underfunding would increase 37% to $41 by 2019.
“This deal confirms plan sponsors' worst fears, that Congress isn't going to stop,” said Michael Kreps, a principal with Groom Law Group, whose firm is handling what he called an unprecedented number of terminations and derisking activity, in large part because of rising PBGC premiums.
To budget negotiators trying to avoid a government shutdown or hitting the federal debt ceiling on Nov. 3, it was a matter of numbers and political necessity. At least on paper, PBGC premium increases will pay for other federal programs and avoid painful Medicare premium increases when counted as simple federal revenues. In reality, premiums go to the PBGC, not into the general Treasury.
But to defined benefit plan executives and consultants trying to help sponsors manage for the long run, being singled out year after year seems unfair and makes the future too uncertain.
“It's unfortunate that Congress pretends to balance the budget by punishing employers who offer pensions,” said Joshua Gotbaum, former PBGC director and now a resident scholar at the Brookings Institution in Washington. “Raising PBGC premiums doesn't add a dime to the U.S. Treasury, but it does give businesses another reason to stop providing pensions,” he said.
Added Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co.: “We got some really bad news in an area where we've had nothing but bad news. This is just going to further encourage plan sponsors to take actions to make their plans smaller” to reduce the premium bills.
Matt McDaniel, a Philadelphia-based Mercer partner who leads the defined benefit risk business in the U.S., said rising PBGC premiums have been one of the most commonly cited reasons for sponsors to offer lump-sum cashouts to vested former employees or buy annuities for retirees. “It makes that type of activity that much more compelling,” he said.