President Donald Trump’s 2021 federal budget proposes raising approximately $26 billion in new premiums for the Pension Benefit Guaranty Corporation’s (PBGC) multiemployer program over the next 10 years, which it says will help the program remain solvent over the next 20 years.
The PBGC’s multiemployer program insures the pension benefits of approximately 10 million workers and, according to the agency’s own projections, the program is in “dire financial condition” and is expected become insolvent by the end of fiscal year 2025.
“PBGC premiums are currently far lower than what a private financial institution would charge for insuring the same risk,” the budget states. “The proposed premium reforms would improve PBGC’s financial condition and are expected to be sufficient to fund the multiemployer program for the next 20 years.”
The budget notes that the multiemployer program’s deficit for 2019 was $65.2 billion, with only $2.9 billion in assets and $68 billion in liabilities, adding that pension plans would see their guaranteed benefits cut by as much as 90% if the PBGC becomes insolvent. It also said the multiemployer premiums are currently “very low” at a flat rate of just $30 per participant in 2020.
To stave off insolvency, and better align multiemployer premiums with the risk PBGC is insuring, the budget has proposed the creation of a variable-rate premium (VRP) based on plan underfunding, as is the case with the PBGC’s single-employer program. This would include an exit premium assessed on employers that withdraw from a plan to compensate for the additional risk imposed on the PBGC.
However, an increase in premiums may not be palpable for many of the companies in the multiemployer programs, said Mike Moran, managing director of Goldman Sachs Asset Management. Moran said that because these plans are typically grouped on an industry basis, the ones in struggling industries, such as retail or trucking, may not be on the strongest financial footing and could have difficulty paying more in premiums.
“I think it’s a tricky problem on the multiemployer side because they need more money to plug that deficit in the PBGC system,” Moran told CIO. “On the other hand, a lot of those companies that are participating in multiemployer plans are ones that may potentially be in financial distress.”
Moran pointed out that increased premiums have led many companies in the single-employer program to increase the funded levels of their plans or opt for risk-transfer strategies, such as moving participants into an annuity. However, that’s not as easy with multiemployer plans because they have to act collectively.
“A variable-rate premium definitely does provide an incentive to provide more funding into the plan to get out from under the premium,” Moran said, “but the question becomes where is that money going to come from?”
Moran also said a spike in premiums could lead companies to move away from these plans to reduce their exposure. “They could say we’re not going to participate in these plans, we’d rather hire workers that aren’t covered by a multiemployer plan, that way we’re not paying into them.”
Meanwhile, the PBGC’s single-employer program is in far better financial condition than the multiemployer program, even reaching a “modest positive net position” for the second year in a row, according to the budget. Because of this, the proposed budget would freeze premium rates for many single-employer pension plans for three years and adjust the variable-rate premium cap to restore the incentive for employers to improve funding of promised pensions.