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Jerry Geisel

Proposed bill would allow employers to prepay PBGC premiums

March 30, 2014 - 6:00am

PBGC


A proposal to allow employers to prepay up to five years of insurance premiums to the Pension Benefit Guaranty Corp. could be an attractive short-term option for some employers, but the longer-term risks could outweigh the immediate financial rewards.

Under the bipartisan U.S. Senate proposal, backed by five Senate Democrats and five Senate Republicans and attached to S. 2149 to extend unemployment benefits, employers could pay their current year PBGC premium and up to five additional years of premiums starting in 2015.

The prepayment option would apply only to the so-called flat rate premium, which will be $57 per participant in 2015. It would not apply to the variable-rate premium paid by employers with underfunded pension plans.

The appeal of the prepayment approach is that it would shield the employer from future premium increases for up to five years.

For example, an employer with 20,000 pension plan participants that decided to prepay its 2016 premium at the time it paid its 2015 premium would pay a $57 per participant premium for both years. That would shield the employer from the scheduled 2016 premium of $64 per participant, cutting the employer's tab by about $140,000.

Premium increases in 2017 and later are tied to wage inflation.

Employers with a sizable number of pension plan participants could save “a fair amount of money. I could see that would be attractive for some employers,” said Deborah Forbes, executive director of the Bethesda, Md.-based Committee on Investment of Employee Benefit Assets, which represents large pension sponsors.

“A short, one-year time frame makes the most sense,” rather than paying three to five years in advance, said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co.

But if an employer were to make prepayments for more than a year or two, the proposal's financial risks may outweigh its potential rewards, experts say.

Under the bill, if an employer's participant count increased in a subsequent year, employers that prepaid would have to pay the current-year rate on the additional participants.

However, if the number of pension plan participants shrank in subsequent years, the employer would not receive a refund. Many employers have frozen their pension plans and participant counts are declining.

In addition, should an employer de-risk its pension plan, such as Verizon Inc.'s 2012 purchase of a group annuity from Prudential Insurance Co. of America that reduced Verizon's participant count by 41,000 by shifting retirees' benefits to Prudential, there would be no refund of PBGC premiums they prepaid.

Opting for prepayment for a year “could make sense, but for five years would be too much risk, with a very limited upside,” said Jim McHale, a principal with PricewaterhouseCoopers L.L.P. in New York.

“If you are contemplating de-risking, don't forget you don't get a premium refund” of prepaid PBGC premiums, said Drew Crouch, director of government relations at Buck Consultants L.L.C. in Washington.

Another disadvantage of multi-year premium payments is an employer losing any investment income on that money paid in advance to the PBGC.

“You lose the time value of money. That is the most compelling reason” not to opt for the prepayment approach, said Bruce Cadenhead, a partner and chief retirement actuary at Mercer L.L.C. in New York.

The measure's fate remains uncertain.

While the broader unemployment legislation is expected to receive Senate approval, House Speaker John Boehner, R-Ohio, strongly opposes the measure.

Still, the PBGC prepayment proposal could resurface.

“I could see it popping up in other bills,” the Committee on Investment of Employee Benefit Assets' Ms. Forbes said of the revenue enhancing measure that would appeal to some lawmakers.

 



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