(December 20, 2013) — Increases in Pension Benefit Guaranty Corporation (PBGC) premiums could be catastrophic to defined benefit (DB) plans, according to Russell Investments’ Bob Collie.
The Bipartisan Budget Act (BBA) 2013 pushes for a big rise in premiums for single-employer corporate pension plans, making PBGC premiums one of the largest costs of maintaining a DB plan.
“PBGC premiums will over take investment management fees in many cases,” said Collie, chief research strategist for Russell’s Americas Institutional.
Collie outlined two reasons for BBA signing DB plans’ death certificates. First, plan sponsors will face a greater incentive to fund up the plan, particularly due to the variable rate premium increasing to 2.8% of shortfall by 2016: “Only corporations with an unusually high cost of capital will find it advantageous to delay contributions,” Collie said.
DB plan sponsors will also be more inclined to reduce the number of participants through using lump sums and annuity buyouts due to significant increase in per-participant premiums—up to $64 in 2016 from $35 per participant today.
“When you add these together, there’s a big incentive for plan sponsors to revisit the question of whether they really want a DB plan at all.”
Collie also said the BBA proposals are inherently political and “[do] not originate in a desire to protect plan participants or ensure the robustness of plan funding, or even to strengthen the PBGC.”
Instead, the legislation uses the PBGC as a “pawn in the political game,” holding up an excuse to raise premiums to balance the government budget, Collie said. Had the bill been originally intended to help the PBGC, it would make efforts to sustain the multi-employer plans rather than the single-employer plan.
“Plan sponsor resentment of the PBGC—which was already high—may become irreparable,” Collie said.
The PBGC has long been campaigning for an increase to premiums to help deal with its $35.7 billion deficit.
In 2003, the US Government Accountability Office (GAO) added the PBGC to its “High Risk” list of agencies, because it controls neither the benefits it pays nor the premiums it charges.
“Congress has repeatedly raised the PBGC’s premiums, but they remain too low to fund our obligations. That’s why, 10 years later, we remain on GAO’s High Risk List,” the agency’s 2013 annual report says.
“Administrations of both parties have proposed putting PBGC finances on the same basis as other government insurance programs and private insurance, by making the PBGC’s board responsible for setting premiums. Without the tools to set its financial house in order, the PBGC may face for the first time the need for taxpayer funds. That’s a situation no one wants.”
But raising premiums is a contentious issue in the US. Aon Hewitt’s Ari Jacobs told aiCIO earlier this month that the main issue is how to define the right level of premiums to sustain the business model without making the premium so high that the companies who never planned to use the PBGC decide the charges are too high and move out of the system.