As we near the end of the federal fiscal year and consider the possibility of another federal budget standoff, it is important to understand something about Congressional budget math that directly affects the companies that sponsor pension funds in the U.S.
Congress counts billions of dollars as revenue every year that it never receives. The way those revenues are generated contributes to the continued demise of defined benefit pension plans.
Every private sector employer that has a defined benefit pension plan pays premiums to the U.S. Pension Benefit Guaranty Corporation. Those premiums support the insurance the PBGC provides in case that company and its pension should fail. So far, so good.
Those revenues go directly to the PBGC. So far, so good.
The federal budget never sees those revenues, but Congress raises the rates every year and counts them as federal revenue anyway. Not so good.
PBGC premiums are complicated. First of all, they are the same for every company whose pension plan is at least 80% funded. So if you are a money-losing company with a junk bond credit rating in a dying industry, your premium is the same ($96 per head) as the premium for a profitable company in a healthy industry. That is like a life insurance company charging the same premium to a 30 year-old marathon runner and a 70 year-old who smokes two packs a day.
For years, the community of plan sponsors that offer DB pensions has been asking for premiums that are based on the actual risk the company and plan pose to the PBGC. But Congress refuses to grant that request. It is obvious that premiums are too high. Ten years ago, the premium was less than half its current level. But if premiums were market- and risk-based, they would be lower, and that would mean less “revenue” for Congress to count in the budget.
There actually is one “risk-based” premium structure at the PBGC, but it does not really make sense either. If the pension plan is less than 80% funded, there is an extra premium. It is $52 for every $1,000 of underfunding, up to a limit of $652 per participant. (Ten years ago, it was $9 per $1,000 of underfunding.)
At first glance, that may seem reasonable. One would think that a less-well-funded plan is a greater risk to the PBGC than a better funded plan. But if a very healthy employer that poses no risk of bankruptcy at all chooses to keep its plan funded at 70%, how does that risk compare to an unhealthy company that keeps its plan funded at 85%?
Congress should let the PBGC underwrite the real risks it faces in an actuarially sound way. But it won’t do so, because it wants to “count” the “revenue” as an offset to other federal spending.
So how does this further the demise of DB plans? Ask the employers who are freezing their plans or transferring them to an insurer. The PBGC’s own website states that numerous reports and written testimony cite PBGC premiums as a significant factor in the decision by an employer to close pensions and transfer pension risk to an insurer.
It is particularly galling to employers that the premiums have continued to rise, even when the PBGC’s own funded status has improved tremendously. When I ran the PBGC, the corporation faced a substantial deficit in its funded status, which we reduced by nearly $10 billion. Today the single-employer system of the PBGC is overfunded. It had a surplus of $36 billion at the end of fiscal year 2022, and everyone knows the premiums keep rising so Congress can count the revenue. This makes the PBGC premiums a phantom tax that makes employers want to freeze or transfer their pension funds.
The numbers at stake are not large in federal budget terms. The total premiums for the single-employer system are only $4.4 billion. That is a drop in the federal budget bucket. But it is a slap in the face to the very employers who continue to offer defined benefit plans. If Congress really cares about retirement security and defined benefit pension plans, it should begin letting the PBGC charge the appropriate premiums based on actual risk.
And it should stop the pretense that these premiums create revenue for the federal budget. When that pretense stops, Congress will no longer have an incentive to keep raising the rates.
Charles E.F. Millard is a senior adviser for Amundi U.S.; he is the former director of the PBGC.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc., its affiliates or Amundi U.S.
Tags: Charles E.F. Millard, defined benefit pension, PBGC, PBGC premiums