Q&A: Julio A. Portalatin, Mercer L.L.C.Reprints
Federal lawmakers over the past few years have repeatedly raised premiums employers with pension plans pay the Pension Benefit Guaranty Corp. Julio A. Portalatin, president and CEO of Mercer L.L.C. in New York, discusses what's driving those premium hikes and the negative consequences of escalating premiums in an interview with Business Insurance Editor-at-Large Jerry Geisel. Edited excerpts follow.
Q: As recently as 2005, the premium employers with defined benefit pension plans had to pay the PBGC, the federal agency that guarantees plan participants' benefits, was $19 per participant. Since then, however, Congress has raised rates several times. Under legislation Congress passed in 2015, the premium will rise to $80 per plan participant by 2019. Are these kind of rate hikes justified?
A: Some of the hikes in the past were justified. They helped to financially shore up the PBGC. However, the most recent ones seemed to be more for offsetting government spending than for proper funding of the PBGC. The PBGC's most recent financial report underscores the point that its trust fund for the single-employer insurance program does not face an immediate or long-term threat of default. Even the PBGC's own analysis does not call for an increase in premiums for single-employer pension plans. So the message for Congress in my view could not be any clearer: Stop raising single-employer plan premiums and consider even rolling back the recent increases because of the lack of need to ensure proper funding.
Q: Are rate hikes counterproductive?
A: There is no question they add to the cost of maintaining a defined benefit plan. The hikes certainly are counterproductive, as they give plan sponsors incentives to transfer liabilities off their balance sheets or leave the system entirely. That ultimately reduces private pension plan coverage, which the PBGC was established to protect.
Q: What can be done to at least curb rate hikes?
A: Ending the practice of double counting would help by discouraging the assumption that those funds are available for other purposes.
The funds can only be used by the PBGC to help secure the pension benefits of participants in underfunded pension plans of failing companies.
However, the rates keep being raised ... due to the illusion that those funds are available for other purposes — which they are not.
Unfortunately, that continued practice will lead to companies having to make continual decisions as to the future viability of defined benefit programs.
Q: Is there a future for defined benefit plans?
A: It depends on whether current alternatives to the plans provide good outcomes. The jury is still out on that one. I'm talking mostly about defined contribution plans, such as 401(k) plans. Defined benefit plans are an efficient vehicle for providing lifetime income for participants.
Q: Mercer several years ago set up a private health insurance exchange. In those exchanges, employees, and in some cases, retirees, can choose from many plans. How has that worked out?
A: In just over three years ... about 1.4 million active employees and dependents are part of Mercer Marketplace. We have added 220-plus employers spanning more than 25 industries. Employer size ranges anywhere from 100 to 100,000 or more employees. We have three years of data behind us now. On cost reductions, so far, we are pleased with the results. Clients have saved up to 15% on their benefit plans in the first year, the average being 9% to 10%. That equates to nearly $1,000 of savings per enrolled employee. That is nothing to sneeze at.
The other thing is that while this year's health benefit cost increases have been on average about 4.5% in the entire market, clients in the Mercer Marketplace have experienced on average only a 1.6% increase. So, not only is there a first-year savings, but we also cut into the rate of increase in the future to about one-third of what the rest of the market experiences.