PBGC’s good news could sour quickly

As PBGC officials cautiously celebrate a second year of good fiscal news for the single-employer program, plan sponsors are equally guarded about what could happen if more plans drop out or Congress decides it is not done hiking premiums.

Another concern is whether the Pension Benefit Guaranty Corp.'s multiemployer program, projected to be insolvent by 2025, makes single-employer program resources too attractive for policymakers to ignore. The fact that the two programs are legally separated — a fact repeatedly emphasized by PBGC officials — has done little to dismiss fears of it happening if the PBGC's situation gets desperate enough.

Despite repeated PBGC assurances that single-employer program assets cannot be spent to help the multiemployer program, if nothing is done to prevent the multiemployer insolvency Congress could see that option as "a quick fix," said Michael Kreps, Washington-based principal at Groom Law Group LLP during a Nov. 5 keynote address at a recent Pensions & Investments conference.

The recent introduction of a Senate Republican proposal to help critically underfunded multiemployer pension funds and prevent more of them did little to calm fears that the proposed changes — including higher premiums and lower discount rates — could wind up hurting even healthy plans and the PBGC multiemployer program further.

That multiemployer program's $65.2 billion deficit in fiscal year 2019 quickly overshadowed the celebration of the single-employer program's $8.7 billion positive net position, giving the PBGC an overall deficit of $56.5 billion. That prompted PBGC Director Gordon Hartogensis to begin the fiscal year 2019 annual report released Nov. 18 with these sobering words: "The corporation is in a difficult financial position today."

First, the good news. The single-employer program, with assets of $128 billion and liabilities of $119 billion, gained more than $6 billion in net income this past fiscal year, thanks largely to investment gains and more revenue from higher premiums, the report said.

It helped the agency achieve its goal of eliminating its single-employer deficit by 2022 even faster, but it is not safe forever, warned Mr. Hartogensis in the report. "It still faces considerable risk," he said.

That risk could increase if any number of variables change, including the trend among plan sponsors to transfer pension risk through lump-sum offers and pension buyouts, lowering the number of plan participants and reducing premiums paid to the PBGC. Such moves by corporate plan sponsors show no signs of slowing down.

"Clearly the premium piece of PBGC income will go down because employers are taking action," said Linda K. Stone, senior pension fellow at the American Academy of Actuaries in Washington. "Derisking isn't slowing down — it's a vibrant marketplace."

Plan sponsors are still catching their collective breaths from dramatic premium increases in recent years, with the flat per-participant rate for single-employer plans more than doubling to $83 in plan year 2020 from $42 in 2013.

The jumps for variable rate premiums — paid on the amount of benefits that are unfunded — were even more dramatic. Rates that were $9 per participant in 2013 are now $45 in 2020, with a per-participant cap of $561.

Congress is to thank for those premium hikes that were used more than once to offset unrelated budget items, over sponsors' protests. Now, some plan sponsor groups hope to seize this moment of fiscal calm to prevent it from ever happening again by urging passage of the Pension Budget Integrity Act, which would prevent PBGC premiums from being used as an offset for unrelated spending.

Instead of more gimmicks, said Aliya Robinson, senior vice president of retirement and compensation policy for the ERISA Industry Committee in Washington, the latest PBGC fiscal report "should prompt Congress to pursue real and workable solutions immediately."

For now, plan sponsors have tried numerous strategies to reduce their premium bills, including funding up to avoid variable premiums and trimming participant rolls entirely or partly through lump-sum payouts, annuity purchases and other strategies to reduce regular premiums.

While that may be helping control plan costs despite premium hikes, sponsors still deal with uncertainty, considering the "nonsensical" current treatment for premium hikes that the proposed Pension Budget Integrity Act would address, said Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets in Washington, whose members represent more than 100 leading CIOs managing more than $2 trillion in collective assets.

Without the bill, "sponsors have more difficulty since there's a tailwind in the current process for premiums to rise for reasons completely unrelated to the funded status of the PBGC," he said.

And if that isn't enough to worry about, there is potential for the PBGC to be left with more at-risk plans if sponsors of healthier plans have the means and the will to terminate them and leave the PBGC system entirely, said Greg Reardon, principal consulting actuary with Cheiron Inc. in McLean, Va.

Sponsors doing buyouts "are generally well-funded companies, so their participants are no longer covered (by the PBGC program) and what is left is just a larger universe of at-risk plans they have to look out for," he said.

Michael Buchenholz, head of U.S. pension strategy for J.P. Morgan Asset Management in New York, does not expect to see the same level of derisking to absorb premium costs that occurred in 2018.

"The low-hanging fruit has been picked. The plan sponsors that had the willingness to make that contribution (to be fully funded and get out) did so. There are just fewer opportunities. I think this year the risk transfer has not slowed down, but I think it is less and less of an issue, and less and less focused on premiums," he said.

The next worry on the horizon is when pension funding relief enacted several years ago gets near the end of its effectiveness and deficits need to be closed over the seven-year period originally intended under Pension Protection Act, said Mr. Buchenholz, who sees reduced tolerance from sponsors for funded status volatility leading to more conservative portfolios.

"We have already seen this in some public filings. That has implications for PBGC premiums and also (sponsors') thinking about asset allocation decisions. There's more to worry about," he added.

"The biggest thing is diversification within the hedge portfolio. Most sponsors will end up managing their assets similar to the way an insurance company would. The insurance world and the pension world are kind of converging."