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 In one of the most misguided retirement policy moves in recent
memory, the Bipartisan Budget Act of 2015 signed last week by
President Barack Obama increases the odds that more pension plan
sponsors will stop offering defined benefit pensions.
The law imposes a huge increase in the insurance premiums paid by
single-employer plan sponsors to the Pension Benefit Guaranty
Corporation (PBGC), the federally sponsored agency that insures
private-sector pension plans.
PBGC did not request the increase, an agency official confirmed. But
as PBGC premiums are recorded in the federal budget as revenue, the
premium hike added about $4 billion from 2016 through 2025 and
helped reduce the net price tag of the budget act.
Adding insult to injury, Congress did not increase funding for
multi-employer pension funds - even though it is in much worse
financial shape than PBGC’s single-employer program; multi-employer
premiums are not counted as revenue in the federal budget.
All this sounds like the typical Washington budget gimmickry - until
you consider the very real potential consequence that even more
companies will seek to terminate their plans.
Already, the availability of defined benefit pensions has plunged in
the private sector. According to Towers Watson and Co, an employee
benefit consulting firm, 20 percent of Fortune 500 companies had
active pension plans as of mid-2015, compared with 59 percent in
1998.
A recent survey of pension plan sponsors by plan consultants Aon
Hewitt found that 44 percent plan to reduce their PBGC costs through
settlement strategies, including lump-sum offers, or outsourcing the
liability to third-party annuity providers.
And in its annual report issued this week, PBGC notes that the
number of large, fully funded plans that terminated their defined
benefit plans rose in the past year, and that it expects the trend
to gather strength in the years ahead.
PREMIUMS NOW MATTER
PBGC premiums had not been a big factor behind that ongoing shift -
until now.
“They were such a small percentage of cost that they didn’t really
change sponsors’ behavior,” said Joshua Gotbaum, a guest scholar at
the Brookings Institution and former director of the PBGC.
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But the new budget boosts premium rates paid into the PBGC insurance
fund by more than 40 percent over the next four years - and that
comes on top of earlier increases approved in an earlier 2013 budget
deal.
The annual flat per-participant rates paid by plan sponsors will
rise to $80 in 2019 from $64 in 2016. Additional variable rate
premiums, which are based on a plan’s unfunded plan liabilities,
will rise 37 percent - to $41 - by 2019.
“Premiums are a very hot-button issue for some plan sponsors,” said
Alan Glickstein, senior retirement consultant at Towers Watson. “For
a plan with 10,000 participants, the cost is going to be close to $6
million a year. That’s a lot in absolute terms and in relation to
other expenses, like the value of the benefit and funding it.”
PBGC does have financial challenges. The single-employer program’s
deficit rose to $24.1 billion last year, up from $19.3 billion
reported in 2014, according to the annual report issued by the
agency this week - mostly due to short-term interest rate conditions
that affect PBGC’s valuation of future benefit payments.
But even before the premium hikes enacted in the budget legislation,
PBGC’s long-range projections showed that the program’s finances are
likely to improve and that it is “highly unlikely” to run out of
funds in the next 10 years.
That forecast did not deter congressional budget writers. They now
have their $4 billion - but you may be left asking: “Where’s my
pension?”
(The writer is a Reuters columnist. The opinions expressed are his
own.)
(Editing by Beth Pinsker and Jonathan Oatis)
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