PBGC Premiums Push Pensions Toward PRT, Lump Sums

Plan sponsors have “scrambled” to reduce their liabilities as a result of the rising premiums, according to NEPC.

American corporate pensions are increasingly turning to lump-sum payments and risk transfers to avoid mounting Pension Benefit Guaranty Corporation (PBGC) premiums.

In a survey of 184 defined benefit plans by consultant NEPC, 73% respondents said they had implemented a lump-sum payout, up from 65% last year. Meanwhile, plan sponsors who have implemented or are planning annuity buyouts almost doubled from 20% in 2015 to nearly 40% this year.

“The real game changer was what occurred at the end of last year with the PBGC rate premium decision, and plan sponsors have been scrambling on what to do ever since,” said NEPC partner Brad Smith.

When asked how they would change their strategy in response to rising premiums, nearly half of plan sponsors said they are considering a lump sum. A quarter cited the possibility of higher contributions, while 27% leaned toward partial risk transfers as the solution.

However, 39% said they had no intention of changing their plan, while 20% considered and rejected liability reduction strategies such as partial annuitizations due to cost and insufficient information.

“The only lever plan sponsors have to pull is to try and shrink the size of their liability and many still stand pat,” said Smith.

Longevity improvements and falling discount rates placed further PBGC-related strain on plan sponsors, with overall funding levels declining to 79.8% despite double-digit equity returns. The number of plans with funding ratios below 80% increased to 28%, up from 21% in 2015.

Just over a third (34%) said they had considered issuing debt to improve their funding status, although most ultimately rejected the idea. Of these plans, 43% had already implemented a lump sum or partial buyout, and 47% had a funding level below 80%.

“Our expectation is that this anxiety about rate premiums will continue, regardless of who’s in the White House,” said Smith. “We continue to advise clients on the best approaches to improve or maintain their funded status in a low-yield environment, even with a slight rate increase expected before the end of the year.”

Related: Why Robin Diamonte (Maybe) Changed Her Mind about PRT & The ‘Vicious Cycle’ of PBGC Hikes