Despite PBGC deficit, sharp premium hikes stir oppositionReprints
Despite the Pension Benefit Guaranty Corp.'s record high deficit, business groups say recent PBGC premium hikes meant to cover those deficits are unjustified and detrimental to the defined benefit pension system itself.
“The premium hikes are absolutely hurting employers, as well as employees, retirees and their families, and they really threaten the entire defined benefit system as a whole,” said Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee in Washington and a founding member of the Pension Coalition, a group of more than 100 employers, trade associations and professional organizations.
PBGC on Tuesday said its total deficit reached $76.4 billion in fiscal 2015, up nearly 24% from the year before. The deficit for single-employer pension plans accounted for $24.1 billion of that, up from $19.3 billion in fiscal 2014.
The widening deficit was driven by changes in interest factors that increased the value of single-employer program liabilities, PBGC said.
Yet even as recent PBGC projections released in September revealed a healthy single-employer insurance program whose deficit will shrink to $4.9 billion by 2024 because of improved pension plan solvency and premium increases already put into effect, Congress continues to hike premiums paid by employers to the PBGC.
This month, President Barack Obama signed into law budget legislation that will sharply raise premiums employers pay to the PBGC. Under the Bipartisan Budget Act of 2015, the PBGC flat-rate premium paid by all defined benefit plan sponsors will rise to $69 per plan participant in 2017, $74 in 2018 and $80 in 2019.
The PBGC flat-rate premium is currently $57 per plan participant and set to rise to $64 in 2016 under a 2013 law. Also, the variable rate premium paid by employers with underfunded plans, set to rise next year to $30 per $1,000 of unfunded benefits from the current $24, will jump over a three-year period starting in 2017, until it hits $41 in 2019.
The PBGC said Tuesday in a briefing to discuss the deficit that it did not ask for the premium hikes recently enacted.
Still, following this legislation and PBGC's Tuesday report revealing its deficit, business groups have expressed strong opposition to the hikes, explaining that such premium increases will prompt employers to exit the defined benefit system.
“It will cause employers who are already struggling with the cost and the risk related with continuing these plans to consider a way to exit from the system,” Ms. Fildes said.
“Premiums create more burden that make employers throw up their hands and say 'we're done,' and that would be very unfortunate to those companies and families that would be affected,” she said.
“It's a vicious cycle,” said Lynn Dudley, senior vice president of global retirement and compensation policy with the American Benefits Council, adding that there is concern Congress will use the deficit to justify further premium hikes.
“When they increase premiums, they drive healthy employers out of the system. When they drive healthy employers out of the system, there are fewer premium payers, and when that happens premiums are increased” again, Ms. Dudley said.
According to Ms. Dudley and other experts, despite what the PBGC's report may say, the single-employer program is very healthy and “financially more robust,” she said. Ms. Dudley said the wider deficit reported has a lot to do with how PBGC calculates the deficit and uses very low interest rates and assumptions that are not market-based to do so.
Business groups have also called attention to the fact that increases in insurance premiums are being used as a budgeting gimmick by Congress. Though the premiums paid by employers can be used only for the PBGC insurance program, Congress counts the revenue as money going toward other federal government programs, experts said.
“The trend over the past few years to increase PBGC premiums to offset deficit spending elsewhere in the federal budget, without regard to the impact on the pension plan system and the PBGC itself, reflects poorly on the legislative process and threatens Americans' retirement income security,” James Klein, president of the American Benefits Council, said in a Tuesday statement from the Pension Coalition.