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Expect to Pay Higher Pension Premiums

Federal deficit talks could result in Pension Benefit Guaranty Corp. gaining the right to set its own rates.
Sarah Johnson, CFO.com | US
June 24, 2011

Companies that offer defined-benefit pension plans to employees will likely see their premiums rise again. The prospect has been suggested in the ongoing discussions on Capitol Hill over the U.S. government's financial problems.

"Unfortunately, since the PBGC's deficit is going up, [companies'] premiums are going to have to go up," says Joshua Gotbaum, director of Pension Benefit Guaranty Corp., which insures pensions for more than 44 million private-sector employees and retirees. How far up remains to be seen as Congress considers options for raising premiums, which it has done multiple times since the PBGC was created more than three decades ago. Lawmakers could raise just the current premium or, as President Obama has proposed, mandate an entirely new setup that would give the agency the authority to set rates and factor in the overall creditworthiness of a company for what it charges.

Given the PBGC's precarious finances, something has to change. The agency currently has a $23 billion deficit, a "historically high level," according to Gotbaum. "For 30 out of our 37 years — or for most of its existence — the PBGC has had a deficit," he says. The agency is funded by insurance premiums, its investments, and assets from plans it has taken over. Its receipts and disbursements flow through the federal budget, although it does not receive funds from taxes. President Obama's budget proposal in January estimates that giving the PBGC authority to change its premiums would carve $16 billion out of the federal budget over 10 years.

To avoid the continuous shortfall, Gotbaum wants to change how the PBGC's rates take risk into account (the agency becomes trustee of a plan when a company goes bankrupt). Currently, most companies that sponsor pensions pay a flat rate tied to the national average wage index. During the past two years, that charge has been $35 for each employee who has a pension. In addition, companies with underfunded plans pay an additional $9 for every $1,000 of the plan considered underfunded. Most plans currently pay this additional charge, Gotbaum says, as is typical following a downturn. "The variable rate hits people when they can least afford to pay," he says.

A better way, Gotbaum believes, is to determine a company's premium by its overall financial condition. Such a system could be fairer, he says, as financially sound companies are now paying a disproportionate amount to make up for companies that are struggling.

However, businesses are balking at the concept. "The financial status of companies, we feel, has little to do with the risk of a plan," says Aliya Wong, executive director of retirement policy at the U.S. Chamber of Commerce. Companies' credit could fall below investment grade but they could still have pension plans that are 90% to 100% funded, she says.

Earlier this month, the chamber sent a joint letter with several other trade organizations to Congress to express "serious concern" with the proposals. "Raising the PBGC premiums, without making contextual reforms to the agency or the defined benefit system, amounts to a tax on employers," the groups wrote. In addition, they are worried about a government entity making "formal pronouncements about the financial status of American businesses."

Gotbaum calls the concern a "red herring," saying his agency would not be judging companies' credit. Instead, the PBGC would call on companies to determine their premiums, likely based on Dun & Bradstreet assessments. He also contends that many companies could see their premiums decrease or stay the same. About 75% of pension-plan sponsors are investment grade, says Gotbaum. Companies considered riskier would pay a higher premium, as much as triple their current amount.

As it is, the premiums are a "tiny portion" of companies' total labor costs, according to the agency. Still, Wong predicts the proposal for tying PBGC premiums to companies' credit risk will likely be tabled as lawmakers rush to make changes to the federal budget this summer. Instead, lawmakers would likely revisit the concept another time and raise the current premium for now. "That [price increase] alone discourages employers from staying in the system," says Wong.

 




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