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PBGC eases rules on late payments fees, penalties for errors

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WASHINGTON—Pension plan premium relief announced last week is only the first step in reducing regulatory burdens on defined benefit plan sponsors, a top federal official says.

That relief, sought by employer groups and announced by Pension Benefit Guaranty Corp. Director Josh Gotbaum, applies in two situations.

First, penalties no longer will be assessed for late premium payments, so long as the premiums are paid within seven days of the due date, Mr. Gotbaum said.

In addition, penalties will be waived in situations where employers with underfunded plans and subject to an additional premium make inadvertent errors, such as checking the wrong box on a form, that result in them paying less than they actually owe.

“We are trying to reduce the burden we impose on companies. What we are doing...is an example of that,” Mr. Gotbaum said.

Employer groups welcomed the move.

“We have a very positive reaction,” said Jan Jacobson, senior counsel-retirement policy with the American Benefits Council in Washington.

“Certainly, this will be very helpful,” added Mark Ugoretz, president of the ERISA Industry Committee in Washington.

And the relief announced last week may be just the beginning.

“We need to pay attention to what our customers need and want. We need to reduce burdens” employers incur in offering pension plans to their employees, Mr. Gotbaum said.

In particular, he cited the need to revamp the PBGC's premium structure so the PBGC would have the authority to set premiums based on the risk posed by employers and their pension plans to the PBGC. While details have yet to be finalized, the basic concept is that the premium an employer would pay would be based in part on its credit rating.

Under the current structure, employers pay a base annual premium, which in 2011 is $35 per plan participant. In addition, a variable rate premium of $9 per $1,000 of underfunding is imposed on employers with underfunded plans.

“Lots of companies have said, entirely accurately, "We are financially strong. We are not going bankrupt and you are charging us the same as companies that are weak,'” Mr. Gotbaum said.

While not directly in his realm, he also said remaining regulatory uncertainties surrounding cash balance plans need to be resolved.

“There ought to be a market for cash balance plans,” he said, noting that the plans can be designed to be no more expensive than defined contribution plans, such as 401(k) plans, but still shield employees from investment risk, unlike defined contribution plans.

Mr. Gotbaum's comments came at a time when the PBGC premium base is shrinking as more employers freeze their defined benefit plans, with few companies setting up new plans.

As its premium base is shrinking, the PBGC faces a more than $20 billion deficit—the difference between its assets and its guarantees—to pay benefits to participants in underfunded plans taken over by the agency after sponsors went out of business or could no longer afford to continue the plans.

“It is music to our ears” that he wants to reduce regulatory burdens, the American Benefits Council's Ms. Jacobson said.

On the other hand, there is skepticism about a move, which Congress would have to approve, to a risk-based premium.

“Many plan sponsors are not publicly held. Assessing their creditworthiness could be a daunting task,” said Alan Glickman, a senior retirement consultant in the Dallas office of Towers Watson & Co.

Others say the best way to encourage employers to remain in the defined benefit plan system is to ease funding rules to give employers more time to fund benefit commitments. Under a 2006 law, employers have seven years to amortize liabilities.

The ERISA Industry Committee's Mr. Ugoretz said that amortization period needs to be stretched out as employers face significant increases in required contributions to their plans due to low interest rates that have boosted the value of liabilities and the equities market slump that has reduced the value of plan assets.

“Employers are looking at extraordinary funding obligations,” he said.