Ducking a Premium Blow

Corporate pension-plan managers are breathing a sigh of relief as Congress appears to have dropped any intention of raising the premiums companies pay to the Pension Benefit Guaranty Corp.

By Steve Barlas

Potentially higher flat and variable rate premiums have been a looming concern over the past few weeks as the U.S. House of Representatives and the Senate work feverishly to pass a bill replenishing the federal highway fund, which is nearly out of money.

The highway bill would have simply been a handy, legislative vehicle for an amendment -- e.g. the premiums increase -- having nothing to do with http://www.hreonline.com/images/463819565congressM.jpghighways and everything to do with helping head off a looming PBGC default.

The House and the Senate have both passed a bill (H.R. 5021) raising about $11 billion (House) and $8 billion from some similar and some different sources. The House bill includes a provision on pension "smoothing." It would raise $6.4 billion over 10 years. The Senate Finance Committee's version would have produced $2.9 billion.

These changes give corporations more flexibility in determining pension contributions they need to make. The new method for liability calculations will raise federal revenue during the 10-year budget period because they in essence result in smaller corporate federal tax deductions during that period, leading to additional corporate revenue subject to federal taxes, according to Harry Conaway, head of Mercer's Washington resource group.

But the full Senate deleted the finance committee's smoothing provision in a vote on the Senate floor on July 29. Sen. Ron Wyden (D-OR), chairman of the Finance Committee, complained the House "overused" pension smoothing. Sen. Bob Corker (R-TN) went further calling any pension smoothing a "gimmick" and "generational theft."

Prior to that Senate floor vote, Kathryn Ricard, Senior Vice President for Retirement Policy at the ERISA Industry Committee, said,

"ERIC is supportive of the pension smoothing extensions included in the House and Senate bills, but we are even more appreciative that the lawmakers decided against including another round of PBGC premium increases in their legislation," says Kathryn Ricard, senior vice president for retirement policy at the ERISA Industry Committee.

But the full Senate deleted the Finance Committee's smoothing provision in a vote on the Senate floor on July 29. Sen. Ron Wyden (D-OR), chairman of the Finance Committee, complained the House "overused" pension smoothing. Sen. Bob Corker (R-TN) went further calling any pension smoothing a "gimmick" and "generational theft."

It wasn't clear whether the two bodies would be able to resolve that difference prior to leaving Washington for the congressional, month-long recess. The notion of higher PBGC fees arose from President Obama's fiscal 2015 budget proposal, now before the appropriations committees in both houses. Obama proposed another $20 billion increase in PBGC premiums over ten years (beginning in 2017). Corporate sponsors of single-employer plans (multi-employer plans have their own set of rules; the construction industry is the heaviest user) already face significant upcoming increases in both flat and variable pension rate premiums. Variable rates are only paid by companies with severely underfunded plans. The flat rate increases from $35/participant in 2012 to $64/participant in 2016. The rate was $19 in 2005 and jumped to $30 in 2006. The variable rate goes from $9 per $1000 of uninsured value to $29. It had been $9 since 2006.

But ever-higher premiums have two major liabilities. They threaten to force corporations with fully-funded plans to drop their pension plans -- as they pulled their fees from the system - would result in further underfunding of the PBGC, which is seemingly always on the precipice of bankruptcy. That threat is primarily posed by multiemployer pension plans. The PBGC's fiscal 2013 Projections Report, released on June 30, estimates the multi-employer FY 2013 deficit of $8.3 billion will widen to, on average, $49.6 billion by FY 2023. Single-employer plans cover about 30 million participants. Their FY 2013 deficit of $27.4 billion is projected to narrow to, on average, $7.6 billion by FY 2023. It is highly unlikely that the single-employer program will run out of funds in the next 10 years, the report said.

 

The Obama proposal would not only raise PBGC fees, but also begin a transition to "risk-based" premiums based on the health of a pension plan. That kind of "risk-based" fee structure was advocated by the Government Accountability Office in a Nov. 7, 2012 report.

Some companies with well-funded single-employer plans feel that too high a percentage of their too-high fees go to employees of bankrupt companies whose pensions the PBGC is responsible for -- so-called legacy costs. "The greater the overhead for delivering one dollar of benefit, the more employers start to think whether a defined benefit is the best mechanism for delivering the benefit," says Arthur Noonan, a Pittsburgh-based senior consultant and actuary at Mercer.

 

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Aug 4, 2014
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