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Budget bill includes PBGC premium hike

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Employers would be hit with another big — and many say, unnecessary — hike in insurance premiums they pay the Pension Benefit Guaranty Corp. under budget legislation that lawmakers could consider as soon as Wednesday.

Tucked away in the 144-page measure is a provision that would raise both the flat rate premium paid by all defined benefit plan sponsors and the variable rate premium paid by employers with underfunded plans.

Under current law, the flat rate is set to increase in 2016 to $64 per plan participant from the 2015 rate of $57 per participant.

After the 2016 premium hike, current law does not call for future flat rate premium hikes, except to match yearly increases in national wages.

The budget measure, which would extend the government's borrowing authority, though, would jack up the premium in 2017 to $68 per participant, $73 in 2018 and $78 in 2019.

In addition, the variable rate premium, which is currently $24 per $1,000 of plan underfunding and is, under current law, scheduled to increase in 2016 to $30 per $1,000 of plan underfunding, with no future increases except to match wage inflation, would increase by $2 in 2017 and $3 in both 2018 and 2019.

An amendment to the measure that the House is expected to adopt would boost premiums even more. Under that amendment, to be proposed by outgoing House Speaker John Boehner, R-Ohio, the flat rate premium would increase to $69 per participant in 2017, $74 in 2018 and $80 in 2019. The variable rate premium also would be increased slightly higher than the original proposal.

The Obama administration defended the premium hike.

“The proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes premiums would likely remain a relatively small percentage of a company's annual pension contribution and a tiny fraction of total compensation costs,” an administration official said.

These proposed increases come at a time when, according to a recent PBGC report, the agency's financial health is improving.

In that report, the PBGC projected that the deficit in its single-employer insurance program, which is largely funded by premiums paid by employers with pension plans, will shrink to $4.9 billion by 2024, down from last year's actual deficit of $19.3 billion. Last year, the PBGC projected that its deficit would shrink to $7.6 billion by 2023.

In its report, the PBGC attributed its shrinking deficit to improved pension plan solvency and premium increases.

The proposed premium hike has outraged benefit lobbying groups and others, who say it was driven by budget gimmickry, with the additional funds being recognized as a federal budget deficit offset — rather than a PBGC need for additional revenue.

And they warn, the premium hike will be damaging to both the PBGC and defined benefit plan system.

“It is an incredibly bad idea. It will have devastating consequences for defined benefit plans,” said Deborah Forbes, executive director of the Bethesda, Maryland-based Committee on Investment of Employee Benefit Assets, which represents large pension sponsors.

“It is incredibly short-sighted and wrong,” added Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council in Washington.

Experts say another premium hike will lead more employers to consider and implement so-called derisking strategies, such as offering selected plan participants the option to convert their monthly lifetime pension benefit to a cash lump sum or turn over, through the purchase of group annuities, the liabilities to an insurer.

“Increases in PBGC premiums have been a big driver in the uptick in pension plan risk transfers,” said Matt McDaniel, a partner with Mercer L.L.C. in Philadelphia.

Those approaches can dramatically reduce the size of their pension plans and slash premiums employers pay the PBGC, leaving the agency, with less money to pay benefits to participants in failed plans the agency has taken over.

“The premium increase is just another unnecessary burden on employers who sponsor defined benefit plans giving them more reasons to consider exit strategies,” Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee in Washington said in a statement.

“This will weaken the commitment of employers, who will work to make their plans smaller as quickly as they can,” said Alan Glickstein, a senior retirement consultant with Towers Watson & Co. in Dallas.

The budget measure also would repeal a provision in the health care reform law that will require — once regulations are finalized — employers with at least 200 employees to automatically enroll employees who do not choose a health care plan.