The Bipartisan Budget Act of 2015, passed Wednesday by the House of Representatives, is causing concern in retirement circles after a pension provision was added that raises the amount of money employers must pay to the Pension Benefit Guaranty Corp. for pension insurance.
“For the third time in four years, Congress has hiked pension premiums to pay for unrelated spending priorities, without regard for what it means to employers, workers and retirees,” said James Klein, president of the American Benefits Council. “Raising premiums every time Congress needs several billion dollars must stop, and stop now.”
The unintended consequence of the increases is that the U.S. will see a lot more companies freezing or shutting down their defined benefit pension plans in the near future, says Alan Glickstein, senior retirement consultant with Towers Watson, adding that PBGC premiums have risen between 7% and 9% every year for the past few years.
“Most of us don’t have expenses going up 9% per year,” he says.
Also see: “Budget act strikes ACA auto-enrollment provision.”
According to the budget bill, flat-rate premiums will rise to $68 per person for plans beginning after Dec. 31, 2016. For plan years beginning after Dec. 31, 2017, premiums will be $73 per person; and for plan years beginning after Dec. 31, 2018, premiums will be $78. Variable-rate premiums – paid by employers with underfunded plans – are expected to increase by $2 per person in 2017 and $3 per person in 2018 and 2019.
At nearly $80 per person in PBGC premiums, a 10,000-person company would spend $800,000 to the agency, which steps in to pay workers’ pension benefits when a company shuts down or is unable to pay its pension liabilities.
“I’ve seen some quotes [in the media] about how these amounts are small, just a tiny percentage. These amounts aren’t small,” says Glickstein. “They are essentially attacks. These plans won’t get anything out of the PBGC; [it’s] just extra revenue for extra spending. It will drive plan sponsors to act.”
Also see: “Plan sponsors concerned about PBGC premiums.”
If enough plan sponsors take steps to reduce their plan liabilities, by either freezing their pension plans to new hires, buying annuities or offering lump-sum payouts, the PBGC pension account could actually decrease, he says.
“The timing of this provision is particularly baffling since the PBGC’s recent Fiscal Year 2014 Projections Report confirmed that the financial condition of the single-employer pension program has significantly improved and has ample assets to pay benefits well into the future,” Klein said. “The irony is that by continually increasing premiums, including on fully-funded plans, Congress and the president are compelling more and more employers to exit the system, which shrinks the premium base on which the PBGC relies.”
In a more “positive development,” Glickstein says, the budget provision would allow plan sponsors to calculate mortality rates in a much more flexible and scientific way and to use their own experience if it’s credible. “They are not locked into the standard mortality tables used by the government. Many corporations are large enough that their experience is different than the standard tables. … This is a positive development,” he says.
Paula Aven Gladych is a freelance writer based in Denver.
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