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Pensions Take Another Hit

Pensions Take Another Hit
(Dollar Photo Club)

Friday, 20 November 2015 08:43 AM

(The writer is a Reuters columnist. The opinions expressed are his own.)

By Mark Miller

Congress pounded one more nail in the coffin of traditional pensions earlier this month — and it did not have to happen.

In one of the most misguided retirement policy moves in recent memory, the Bipartisan Budget Act of 2015 signed last week by President Barack Obama increases the odds that more pension plan sponsors will stop offering defined-benefit pensions.

The law imposes a huge increase in the insurance premiums paid by single-employer plan sponsors to the Pension Benefit Guaranty Corporation (PBGC), the federally sponsored agency that insures private-sector pension plans.

PBGC did not request the increase, an agency official confirmed. But as PBGC premiums are recorded in the federal budget as revenue, the premium hike added about $4 billion from 2016 through 2025 and helped reduce the net price tag of the budget act.

Adding insult to injury, Congress did not increase funding for multi-employer pension funds — even though it is in much worse financial shape than PBGC's single-employer program; multi-employer premiums are not counted as revenue in the federal budget.

All this sounds like the typical Washington budget gimmickry — until you consider the very real potential consequence that even more companies will seek to terminate their plans.

Already, the availability of defined-benefit pensions has plunged in the private sector.

According to Towers Watson and Co., an employee benefit consulting firm, 20 percent of Fortune 500 companies had active pension plans as of mid-2015, compared with 59 percent in 1998.

A recent survey of pension plan sponsors by plan consultants Aon Hewitt found that 44 percent plan to reduce their PBGC costs through settlement strategies, including lump-sum offers, or outsourcing the liability to third-party annuity providers.

And in its annual report issued this week, PBGC notes that the number of large, fully funded plans that terminated their defined benefit plans rose in the past year, and that it expects the trend to gather strength in the years ahead.



PBGC premiums had not been a big factor behind that ongoing shift — until now.

"They were such a small percentage of cost that they didn't really change sponsors' behavior," said Joshua Gotbaum, a guest scholar at the Brookings Institution and former director of the PBGC.

But the new budget boosts premium rates paid into the PBGC insurance fund by more than 40 percent over the next four years — and that comes on top of earlier increases approved in an earlier 2013 budget deal.

The annual flat per-participant rates paid by plan sponsors will rise to $80 in 2019 from $64 in 2016. Additional variable rate premiums, which are based on a plan's unfunded plan liabilities, will rise 37 percent — to $41 — by 2019.

"Premiums are a very hot-button issue for some plan sponsors," said Alan Glickstein, senior retirement consultant at Towers Watson. "For a plan with 10,000 participants, the cost is going to be close to $6 million a year. That's a lot in absolute terms and in relation to other expenses, like the value of the benefit and funding it."

PBGC does have financial challenges. The single-employer program's deficit rose to $24.1 billion last year, up from $19.3 billion reported in 2014, according to the annual report issued by the agency this week — mostly due to short-term interest rate conditions that affect PBGC's valuation of future benefit payments.

But even before the premium hikes enacted in the budget legislation, PBGC's long-range projections showed that the program's finances are likely to improve and that it is "highly unlikely" to run out of funds in the next 10 years.

That forecast did not deter congressional budget writers. They now have their $4 billion — but you may be left asking: "Where's my pension?"

© 2020 Thomson/Reuters. All rights reserved.

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In one of the most misguided retirement policy moves in recent memory, the Bipartisan Budget Act of 2015 signed last week by President Barack Obama increases the odds that more pension plan sponsors will stop offering defined benefit pensions.
pensions, retirement, fees, budget
Friday, 20 November 2015 08:43 AM
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