Higher PBGC Premiums May Mean Fewer Pensions

Expect more lump-sum payouts and annuity buyouts, advisors predict

By Stephen Miller, CEBS Nov 3, 2015

The Bipartisan Budget Act of 2015, signed into law by President Barack Obama on Nov. 2, will, among other actions, sharply increase insurance premiums for single-employer defined benefit (DB) pension plans, beginning in 2017.

The premiums are charged annually to pension plan sponsors by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that insures more than 24,000 private-sector pension plans against default. Under budget scoring practices, premium increases can be treated as revenue gains for the government.

The rate increases for 2016, announced earlier in October, were left unchanged by the budget act.

Increases in PBGC Premiums for Single-Employer Plans

PBGC premiums include two components: a flat-rate premium based on the number of participants covered by a plan, and a variable-rate premium based on the level of the plan’s unfunded vested benefits.

Old Flat Rate

(per plan participant)

New Flat Rate

(per plan participant)

Old Variable Rate

(per each $1,000 of unfunded vested benefits)

New Variable Rate

(per each $1,000 of unfunded vested benefits)












$64 (indexed for inflation)


$30 (indexed for inflation)

$33 (indexed for inflation)


$64 (indexed)


$30 (indexed)

$37 (indexed)


$64 (indexed)


$30 (indexed)

$41 (indexed)


$64 (indexed)

$80 (indexed)

$30 (indexed)

$41 (indexed)

Source: Groom Law Group, Congress Passes Budget Deal Affecting DB and Health Plans

Under the budget act, the premium increases apply only to single-employer pension plans. In contrast, union-managed multiemployer plans were spared from additional premium increases under the deal that Republican congressional leaders negotiated with their Democratic counterparts and the White House.

Among the repercussions of higher premiums, more employers are expected to engage in one or more risk-transfer activities, such as freezing their pension plan, purchase annuities as a first step toward winding down their pension, transferring their plan to an insurance company through a buyout or encouraging participants to exit the plan by taking lump-sum distributions, pension advisors said.

Objections and Warnings

The premium hike was met with sharp criticism from business groups and pension professionals.

“For the third time in four years, Congress has hiked pension premiums to pay for unrelated spending priorities, without regard for what it means to employers, workers and retirees. Raising premiums every time Congress needs several billion more dollars must stop,” responded James A. Klein, president of the American Benefits Council, a national trade association. “If policymakers are serious about Americans' retirement security, they need to stop using employer-sponsored plans as a piggy bank.”

The timing of this provision is particularly baffling, Klein noted, since the PBGC's own recent reports show that “the financial condition of the single-employer pension program has significantly improved and has ample assets to pay benefits well into the future. The irony is that by continually increasing premiums—including on fully funded plans—Congress and the President are compelling more and more employers to exit the system which shrinks the premium base on which the PBGC relies,” Klein said.

The higher premiums will “do nothing to encourage single employers to continue defined benefit plans or improve benefits for retirees. In fact, the increases only work to further weaken the private retirement system,” warned Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee, which represents large U.S. employers.

“The provision will further weaken employers’ commitment to defined benefit plans as many may move to shrink their plans,” commented Alan Glickstein, a Dallas-based senior retirement consultant at Towers Watson. “Unfortunately, Congress views increasing PBGC premiums as an easy way to raise the billions of dollars they need. And until pushing back on more PBGC premiums becomes a high priority in the corporate C-suite, there won’t be any traction in Congress to stop them.”

De-Risking Tactics

Glickstein added that “the high cost of running a pension plan is often a big factor when plan sponsors assess the pension de-risking marketplace. Additional PBGC increases could further skew their assessment away from ongoing pension plan management approaches toward settlement solutions that better address the increasing cost of sponsoring a pension plan.”

“The actual result of these premium increases is that premium revenue will go down as sponsors bail out of the DB system,” concurred Michael Barry, president of the Plan Advisory Services Group, a Chicago-based consultancy. Congress favors raising pension plan premiums “because they count as revenues but don’t count as taxes. Which puts them squarely in the bipartisan crosshairs,” he remarked on his blog.

Barry noted that benefit provider MetLife’s recent 2015 Pension Risk Transfer Poll showed nearly half of defined benefit plan sponsors are considering transferring financial risk associated with their pension plans. A common risk-transfer action is through a buyout—the purchase of an annuity contract that transfers the pension plan’s liabilities to an insurance company. The insurance company makes pension payments directly to plan members and takes responsibility for all investment and longevity risk associated with them, allowing the employer to remove liability for future pension payouts (and PBGC premiums) from its books.

The top catalyst for a pension risk transfer, MetLife found, is additional PBGC premium increases, cited by 51 percent of polled plan sponsors.

“High per-participant premiums encourage sponsors to reduce headcount by annuity buyouts or lump-sum payments” said Bob Collie, Seattle-based chief research strategist for Russell Investments’ Americas Institutional business, on the firm's Fiduciary Matters blog.

Higher PBGC premiums will “force plan sponsors to once again ask themselves if this whole DB thing is really such a good idea at all. And with every plan sponsor who takes steps to reduce their premiums, more pressure is put on the remaining premium base,” Collie noted.

A few positive notes…

The news wasn’t all grim for plan sponsors. The budget act further extends pension smoothing provisions originally enacted in 2012 and extended in 2014. Pension smoothing, or rate stabilization, allows employers to put less money into their pension plans by using calculations that value liabilities using higher interest rates than the prevailing low rates. It also increases revenues to the government, since lower contributions mean employers receive a smaller tax deduction, resulting in increased tax revenues.

Plan sponsors should bear in mind, however, that if future investment returns are not sufficient to make up for lower contributions today, contributions in the future will need to be larger.

The act also eases the way for employers to use plan-specific mortality tables, which could reduce contributions by plans with a larger percentage of older pensioners.

“Those provisions are intended to make it easier for employers to keep their pension plans and therefore have a sound policy purpose,” said the American Benefits Council’s Klein. “By contrast, incessant premium increases drive employers away from plan sponsorship, undermining pension security for workers and retirees and ultimately eroding PBGC's financial integrity.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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