Defined benefit plans are becoming a retirement vehicle of the past — and the recently signed budget funding the federal government for the next two years won’t help. The budget, which President Barack Obama signed into law this week, contains increases for Pension Benefit Guaranty Corporation premiums for single-employer pension plans.
The increased rates “do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees,” says Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee (ERIC). “In fact, the increases only work to further weaken the private retirement system.”
Flat-rate premiums will increase to $69 in 2017; $74 in 2018; and $80 in 2019 — more than twice the 2012 rate — according to PBGC. The increased rates “adds costs and burdens to those who are sponsoring the plans,” says Guarisco Fildes. “There was no need for any additional premium increases for 2016 or beyond.”
PBGC declined to comment, but will be holding a media call Nov. 16 to “further explain our financial position and entertain press queries,” says PBGC Press Secretary Marc Hopkins.
PBGC premium increases shouldn’t be used to fund other government programs, Guarisco Fildes says. “It’s important that if there are increases in the pension area, that it stays in the pension area,” she says.
American Benefits Council President James Klein agrees: “If policymakers are serious about Americans’ retirement security, they need to stop using employer-sponsored plans as a piggy bank.”
It’s not all bad news, though, Klein says. “We recognize that the budget agreement also extends previously enacted pension funding stabilization measures and provides some relief related to assumptions that pension actuaries are supposed to use. That’s welcome news,” he says. “But those provisions are intended to make it easier for employers to keep their pension plans, and therefore have a sound policy purpose. By contrast, incessant premium increases drive employers away from plan sponsorship, undermining pension security for workers and retirees and ultimately eroding PBGC’s financial integrity.”
Employers could exit the system
Some pension plans could go away as employers consider whether or not they want to continue to offer pensions given the rate increases, Guarisco Fildes says. Reducing participants is one way to address the issue, and employers might offer lump sums to employees, says Jon Waite, director of the advisory team and chief actuary at SEI Institutional. Plan sponsors should consult with their adviser to understand the impact the premium increases will have and to devise a strategy going forward, he says.
The premium hikes affect plan sponsors more than anyone else, however, employers won’t be the only ones impacted, Guarisco Fildes says. As more and more plans exit the system, there will be less demand for DB consultants and asset managers, she says. “It’s a rather large ripple effect that will go through the whole system.”
Though the rates through 2019 are set, Guarisco Fildes says she will ramp-up efforts to educate legislators about the impact of PBGC premium increases. Large employers help innovate retirement options for employees, she says, and ERIC wants to work with Congress to improve retirement savings, instead of encouraging an exit from the pension system. “Our focus will be on insuring that this does not happen again.”
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