The last major congressional legislative action of 2013 will mean billions of dollars in additional — and some say unnecessary — insurance premiums employers will have to pay to the Pension Benefit Guaranty Corp.
Under provisions tucked into a federal budget agreement measure, which lawmakers approved last month, the PBGC flat-rate premium, which is paid by all defined benefit plan sponsors, will rise in 2015 to $57 per plan participant and to $64 in 2016. The premium now is $49 per plan participant.
In addition, the variable-rate premium, which is paid by employers with underfunded plans, will increase to $24 per $1,000 of plan underfunding in 2015, up from $14 this year and $29 per $1,000 of plan underfunding in 2016. The PBGC uses the premium revenues to help pay for benefits promised — but not fully funded — to employees and retirees in plans the agency took over after plan sponsors ran into severe financial difficulty or went out of business.
In all, these latest increases, which come on top of steep premium hikes mandated under legislation Congress passed in 2012, will require employers to pay close to an additional $8 billion in premiums between 2014 and 2023, according to an estimate last month by the Congressional Budget Office and the congressional Joint Committee on Taxation. Last year, employers paid nearly $3 billion in PBGC premiums, roughly double those of 2005, due largely to earlier rate hikes.
The latest premium hike has outraged employer benefits lobbying groups, who say it was driven by federal budget gimmickry — with the additional funds being recognized as a federal budget deficit offset — rather than because of a new PBGC need for additional revenue.
The premium increase is a “convenient way to pay for other things. It is totally lacking in policy support,” said James Klein, president of the American Benefits Council in Washington.
“It is a gimmick. It is smoke and mirrors,” said Deborah Forbes, executive director of the Bethesda, Md.-based Committee on Investment of Employee Benefit Assets, which represents large pension plan sponsors.
In fact, the PBGC did not specifically request the premium increase, an agency spokesman said. Still, the agency thinks “premiums always have been too low for the agency to do its job,” PBGC Director Josh Gotbaum said in a statement.
While the agency reported a $27.4 billion deficit in its single-employer insurance program in 2013, that's a drop from the $29.1 billion deficit in 2012. In addition, the single-employer insurance program reported $1.76 billion in net income in 2013, a sharp improvement compared with a $5.9 billion loss in 2012 and the first time in five years that the program reported net income.
While the latest hike in premium rates will boost revenue, experts say the increase will be counterproductive in the long run by giving employers a greater financial incentive to shrink their pension plans, reducing their PBGC premiums and, with that, cutting the amount of premiums collected by the PBGC.
“The increase will do substantial harm to the defined benefit plan system. It will cause more employers to exit the system,” said Scott Macey, president and CEO of the ERISA Industry Committee in Washington.
Mr. Macey said the increase will be counterproductive. If more employers reduce the size of their pension plans, such as transferring benefit obligations through purchasing group annuities from insurers, the PBGC's revenue base will continue to shrink, increasing the need for new premium hikes and leading to more employers to reduce the size of their pension plans. Major employers such as General Motors Co. and Verizon Communications Inc. already have done this.
As premiums increase, “that makes annuity purchases look a lot less expensive,” said Mike Archer, a senior retirement consultant with Towers Watson & Co. in Philadelphia.
Pension lobbyists say more needs to be done to educate federal lawmakers on the negative consequences of continued PBGC premium hikes.
“We have to ratchet up the message that incessant premium increases are unacceptable,” ABC's Mr. Klein said.
Continued premium increases give plan sponsors another reason to consider whether they should keep offering a defined benefit plan, Mr. Archer said.
Even before the most recent premium increase, the number of pension plans covered by the PBGC had declined dramatically.
Last year, employers with about 23,000 pension plans paid premiums to the PBGC, down from nearly 29,000 in 2008 and a huge drop from the all-time high of more than 112,000 plans in 1985.
The number of participants in those plans also has declined every year since 2004, when 34.5 million plan participants were enrolled in employer plans insured by the PBGC. Last year, about 32 million participants were in plans insured by the PBGC.