GSAM’s Moran: Surging PBGC Fees Incentivize Pension De-Risking

Companies are increasingly considering annuitization and lump sums due to sharply rising premiums.

Pension Benefit Guaranty Corp. (PBGC) fees have risen so sharply, and so quickly, that they have not only become a major factor in how companies fund their pensions, but have even incentivized de-risking strategies, says Mike Moran, managing director for Goldman Sachs Asset Management (GSAM).

The two main fees pension funds must pay to the PBGC are a variable-rate fee that is tied to its liabilities, and a flat-rate fee for each of a plan’s participants. The flat-rate fee has nearly doubled for single-employer plans to $69 from $35 in 2012, and has more than tripled for multiemployer plans to $28 from $9 in 2012. Meanwhile, the variable rate has also more than tripled from 0.9% in 2013 to 3.4% today, and will surpass 4% by the end of the decade, says Moran.

Prior to this recent surge in prices, the prevailing attitude among pension funds was to wait for interest rates to rise to help alleviate their funding deficit, says Moran. But because interest rates haven’t budged, and the PBGC fees continue to rise, it has become too expensive for many pension administrators to do nothing.

“The change that has really happened over the last year or two, in particular over the past six months, is plans are saying maybe rates will rise, maybe they’re not going to rise,” said Moran in an interview with CIO. “But while we’re waiting for that to happen, which we can’t control, what can we control?”

One of the things pensions can control, says Moran, is increasing their funding level to reduce their liabilities, and thus lowering their PBGC variable-rate premiums, which has become a growing trend for pension fund providers. According to GSAM’s Corporate Defined Benefit Mid-Year-Update, 2016 was the strongest year for contributions to US corporate defined benefit plans since 2013. The report also said it expects that trend to continue, with a 10% increase in total contributions in 2017.

But while the rising variable rate has had the effect of spurring pensions to boost their funding status, the flat-rate fee could come back to bite the PBGC, says Moran. Because the flat-rate premium is based on the number of participants in a plan, the more participants a fund has, the higher the premium is. Therefore, the only proactive measure a company can make to lower the cost of the flat-rate fee is to reduce the number of participants in its pension plan.

“That’s part of why you see a lot of this risk transfer activity around annuitization and lump sums,” said Moran. Once a company moves its participants to an annuity, or if they take a lump sum, their plans are no longer subject to PBGC fees.

Moran said that a lot of companies that can afford to do so are going to insurance companies to buy annuities, or offering lump sums to their participants so that they are no longer beholden to the PBGC.  The result of this is that with the more financially sound companies leaving the realm of the PBGC, the organization’s fee revenue becomes increasingly reliant on less financially sound companies.

“What you end up with potentially over time is the weaker companies that can’t do that are still in the system,” said Moran. “And in some respects, that can raise the risk of the PBGC.”  

Moran also says that many companies are now viewing risk transfer transactions, such as moving participants into an annuity, as a viable tool to counter the high fees.

“This is a topic that comes up in almost every client meeting,” he says. “Many are evaluating the cost; some may decide it’s not for them, but most plan sponsors we’ve talked to have kicked the tires on it.”


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