A growing deficit in the Pension Benefit Guaranty Corp.'s multiemployer pension program is a credit negative for multiemployer plan sponsors, Moody's Investors Service said in a report issued Monday.
For all plan sponsors, higher PBGC premiums have reduced free cash flow by more than $270 million, the report said.
Moody's analysis was based on the PBGC's annual report issued Nov. 17, showing a multiemployer insurance program deficit of $52.3 billion at the end of fiscal year 2015. The PBGC also reported a $24.1 billion deficit in its single-employer program.
PBGC premiums have increased 340% over the previous eight years. “Given the size of the deficit, such premiums will almost inevitably go up, quite possibly to unaffordable amounts, which will be a credit negative for sponsoring companies,” said Wesley Smyth, Moody's vice president and senior accounting analyst, in the report.
The PBGC's fiscal year 2014 projection report released in September predicted the multiemployer pension plan program would run out of money in 2025, while the single-employer program projections showed continued improvement, with solvency for the next 10 years.
Even with premium increases, Moody's said, “there will come an inflection point where plan sponsors will not be able to afford premiums and the PBGC will run out of money.”
Some multiemployer plan sponsors could see a credit positive if they can take advantage of Multiemployer Pension Reform Act of 2014 provisions allowing them to reduce benefits if the plan is projected to run out of money.
The $17.8 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., is awaiting Treasury Department approval of its proposed rescue plan, and more applications are expected, Moody's said. “We also expect that plan participants and the Treasury will be more willing to accept benefit reductions than if the PBGC had been on a sound financial footing,” Moody's said.