The 'Vicious Cycle' of PBGC Hikes

The budget bill's new round of premium increases could mean PRT, freezing plans, or the end of DB as we know it, according to experts.

The new budget deal reached between the US congressional leaders and the White House on Monday proposes a 22% jump in Pension Benefit Guaranty Corporation (PBGC) premiums over the next four years. 

The 144-page bill, which must be approved by the House and the Senate, would raise premiums for single-employer corporate pension plans to $68 per person for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation.

The PBGC also announced Monday it had increased the flat-rate premium to $64 per person for 2016.

“The new bill’s new round of premium rate increases sends a signal to defined benefit (DB) plan sponsors,” Bob Collie, Russell Investments’ chief research strategist, told CIO. “It’s becoming more difficult and more expensive for plan sponsors to keep a DB plan.”

“The new bill’s new round of premium rate increases sends a signal to DB plan sponsors. It’s becoming more difficult and more expensive for plan sponsors to keep a DB plan.”The latest proposal—largely an effort to balance and squeeze revenue into the budget—is also likely to affect plan sponsors’ decision making in a variety of ways. 

According to Charles Millard, formerly director of the PBGC and currently head of pension relations at Citi, higher PBGC premiums could push plan sponsors towards pension-risk transfers (PRT).

“PBGC premiums are increasingly important to corporate plan sponsors and they’re a crucial element in the equation when a plan sponsor considers whether to transfer a pension plan to an insurance company,” Millard said.

And pension-risk transfers have been popular over the last eight years, according to Prudential’s latest research.

More than $260 billion in pension liabilities have been transferred since 2007, the firm found. At least 40 pension funds in the UK, US, and Canada have also executed transactions of over $1 billion in the last eight and a half years. 

Furthermore, the new bill’s proposed increases in variable-rate premiums would incentivize plan sponsors to fund the plan at lower rates, Collie added. Other plan sponsors unable to keep up with premium hikes will accelerate freezing their DB plans.

However, Collie also warned continued increases in premiums could put PBGC in a worse economic position.

As more and more plan sponsors turn to PRT and freezing their plans, there would be fewer plans actually paying the PBGC premiums.

“It’s a vicious cycle,” Collie said. “It could do more harm to the PBGC revenue base than good.”

Related: Why Corporate Pension Relief Makes Sense… Permanently; PBGC Premium Increases and the Death of DB Plans; Pension Risk Transfers Climb to $260B

By Sage Um

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