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Employers try to cut pension costs by reducing plan size


Escalating Pension Benefit Guaranty Corp. insurance premiums are leading more employers to take steps to reduce the size of their pension plans, according to a new survey.

When asked if they intended to change their pension plans due to legislation Congress passed last year sharply raising PBGC premiums over a three-year period, 32% of respondents said they are considering offering participants the option to convert their monthly annuity benefit to a cash lump sum, according to the survey released Tuesday by Boston-based investment consultant NEPC L.L.C.

After taking a lump sum, affected individuals no longer are in the pension plan, reducing the so-called flat rate PBGC premium — the total amount based on number of plan participants — paid by employers.

In addition, 17% of respondents said they are considering transferring pension benefit obligations to insurers through the purchase of group annuities.

That approach also reduces the flat rate PBGC premium and, by reducing plan liabilities, also cuts backs an employer's exposure to the PBGC's variable rate premium, which is based on the amount of plan underfunding.

On the other hand, 32% of respondents said that due to higher PBGC premiums, they are considering boosting contributions to their pension plans, reducing or even eliminating the PBGC variable premium they would have paid.

Thirty-four percent of respondents, though, said they are not considering plan changes as a result of the higher PBGC premiums.

The hike in PBGC premiums “has gotten the attention of plan sponsors,” said Brad Smith, a partner in NEPC's Atlanta office.

Under the 2015 law, the current base $64 per participant premium will rise over a three-year period until it hits $80 in 2019, while the variable rate premium — now $30 per $1,000 of plan underfunding — will increase to $41 in 2019.

Those rate hikes are supposed to generate an additional $4 billion in premium income for the PBGC through the end of 2025.

But if the premium rate leads to more employers reducing the size of their pension plans, that increase in premium income could be much less than projected, Mr. Smith said

The NEPC survey, conducted in mid-February is based on the responses of 41 employers, whose pension plans range in size from about $50 million in assets to $7.5 billion in assets, with a median size of about $400 million in plan assets.

Responses add up to more than 100% because some respondents who said they were considering making changes selected more than one approach.

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