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Moody's sounds the alarm on premium hikes for multiemployer pension plans

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Looming big increases in multiemployer pension plan insurance premiums will be “credit negative” for participating employers, according to a Moody’s Investors Service Inc. report released Monday.

Earlier this month, Pension Benefit Guaranty Corp., the federal agency that guarantees a portion of multiemployer pension plan participants’ promised but unfunded benefits, reported that the deficit for its multiemployer insurance program hit more than $52.3 billion in fiscal 2015, up from $42.4 billion a year earlier and just $8.3 billion in fiscal 2013.

Aside from lower interest rates, which boosted the value of plan liabilities, the looming insolvency of massively underfunded plans has fueled the huge increase over the last two years in the insurance program’s deficit.

But the money generated by the PBGC’s multiemployer insurance premiums — the rate currently is $27 per participant — is just a fraction of the unfunded benefits guaranteed by the PBGC.

With about 10 million participants in multiemployer plans, this “$27 translates into revenue of only $270 million a year,” Moody’s said in the report.

“Given the size of the deficit, such premiums will almost inevitably go up, quite possibly to unaffordable amounts, which will be credit negative for sponsoring companies,” Moody’s added.

Even if premiums are boosted, “There will come an inflection point where plan sponsors will not be able to afford premiums and the PBGC will run out of money,” Moody’s said.

Still not all the multiemployer plan related news is bad. A 2014 federal law allows financially troubled plans to reduce benefits, with one big massively underfunded plan, the Central States, Southeast and Southwest Areas Pension Plan, currently seeking permission from federal regulators to cut benefits, and more plans to expect to follow next year.

The ability to cut benefits is “credit-positive” news for multiemployer plan sponsors, Moody’s said in its report.