American Benefits Council calls on Congress to reduce PBGC premiums

Rising PBGC premiums and outdated funding laws are hurting single-employer defined benefit plans, and Congress needs to act now to stave off more companies exiting the pension space, according to the American Benefits Council.

"As a result of the PBGC having run deficits in prior years, single-employer plan premiums were raised to extreme levels that are clearly no longer needed in light of the extraordinarily high levels of surplus in PBGC's single-employer plan system," the council said in a set of proposals it's sending this week to congressional members.

The Pension Benefit Guaranty Corp.'s single-employer program, with a net $36.6 billion surplus as of Sept. 30, 2022, has been growing steadily, according to the PBGC's fiscal year 2022 projections report released in August. The projected mean position at the end of fiscal year 2032 is now a surplus of $63.6 billion, the report noted.

"Why are we having this huge tax on DB plans that's pushing them out when no one would suggest there's a need for these premiums?" said Lynn Dudley, senior vice president, global retirement and compensation policy, at the council.

In crafting the series of policy proposals for Congress to consider, the council spoke with its employer members about the defined benefit plan landscape. Employers said the increased premiums and funding volatility are driving them away, Dudley said. Congress sets the PBGC premiums.

In 1998, 49% of the Fortune 500 companies offered a traditional defined benefit plan that was open to new salaried employees. By 2021 that number had declined to 3%, the council noted, citing data from Willis Towers Watson.

The decline accelerated in 2006 when PBGC premiums started rising quickly following passage of the Pensions Protection Act, which focused on shoring up the defined benefit system. the PBGC's flat rate premium and variable rate premium have both more than quintupled since 2005, the council noted: the flat rate to $96 (indexed) from $19 and the variable rate to 5.2% from 0.9% of underfunding.

"We don't want a situation where higher and higher PBGC premiums create an environment where employers go, 'Is it cheaper for me to just get out of this thing? Is this creating too much risk for my company and affecting my employees because my company is under this sort of uncontrollable risk where somebody else is setting the cost? Maybe I should look for a way to reduce that risk,'" Dudley said, adding that PBGC currently doesn't need extra funding.

Constance Donovan, the PBGC's participant and plan sponsor advocate, in her most recent annual reportreleased in December, raised concerns that premiums are too high. She recommended that "discussions should consider topics such as current premium levels and whether PBGC can or should raise the question regarding whether the high level of premiums undermines its mission to maintain the defined benefit system."

The council, in its package of proposals, outlined several ideas it said could address the premium issue. But the "most appropriate solution" is to enact an automatic system that adjusts single-employer plan premiums based on the funded status of PBGC itself.

The bipartisan Rightsizing Pension Premiums Act of 2017, which had broad backing from the retirement industry but was never signed into law, called for the PBGC's funded status to be determined by the Treasury Department under the same rules that Congress applies to private pension plans, except that interest rate stabilization would not apply. Moreover, premium levels would be reduced when the PBGC is very well funded, as it is now, but moved back to current levels if PBGC's funded status were to decline significantly, the council noted."Why are we just building in a future problem if we set the premiums at X and X might turn out to be wrong?" Dudley said. "It could be too high or too low," which is why basing premiums on PBGC's funded status makes sense.

The other major issue the council would like Congress to address is oxymoronic on its face: single-employer pension plans, thanks to soaring interest rates, are now overfunded and at risk of termination.

The reason is due to current law that stipulates that surplus assets in pension plans are permitted to be used to pay for nonelective contributions to a defined contribution plan, but only if the plan is terminated. So if a plan wants to use some of its surplus — data from Milliman in July found that the 100 largest corporate DB plans were 103.6% funded with a surplus of $47 billion — then they'd likely have to terminate their pension plan.

"For this reason, we could very easily see a wave of very large plan terminations in the next few years; in fact, it would be surprising if such a wave did not occur, especially since so many defined benefit plans are completely frozen or closed to new hires," the council said in its proposal package.

Kent A. Mason, a Washington-based partner at law firm Davis & Harman and outside counsel for the American Benefits Council, said, "If we don't see legislation in the next few months probably, there will be terminations that could have been avoided."

Separately, one council suggestion to reduce employer risk in offering a pension plan is to tweak existing law and issue guidance on the expanded use of variable annuity plans, in which a plan adjusts participant benefits based to some extent on the return on plan assets.

Making such plans more commonplace would not mean "there's going to be a huge renaissance for DB plans, but I think you could slow the decline and avoid a lot of terminations," Mason said.

In preliminary discussions with lawmakers on these issues, Dudley said the appetite for listening is there, but "the appetite for actually doing something right now is far less because there's just a lot going on outside of this space and they just did SECURE 2.0," a comprehensive retirement security package passed in December.

But the council will continue its lobbying efforts to preserve single-employer DB plans. "It's just too good of a system to give up on it," Dudley said.