Unintended consequences may put defined benefit pensions in further jeopardy

2013

TOO LATE, IT APPEARS THESE PREMIUM INCREASES ARE PART OF THE BUDGET DEAL TO BE ANNOUNCED SHORTLY

Remember those famous words, if you like what you have … If you are one of the relatively few Americans with a traditional pension, budget negotiators in Washington may be putting your pension in jeopardy once again by giving plan sponsors yet another reason to terminate their plans.

Perhaps you have never heard of the PBGC, Pension Benefit Guarantee Corporation, but your employer has. Pension plans pay a hefty premium to the PBGC for each participant and the PBGC provides insurance in the event a pension plan is terminated with insufficient funds to pay promised benefits. On the surface that seems like a reasonable deal. However, the increasing premiums are also an increasing burden on employers.

You have heard about the possible death spiral from adverse selection in health plans, well this is similar. Poorly funded pension plans pay more in premiums thereby making them more costly to maintain; in turn causing them to be terminated and then leaving fewer plans to pay premiums to the government.

A conference committee of the U.S. Senate and House of Representatives is in negotiations to reach a final compromise on a budget for Fiscal Year 2014 by December 13. It is likely that such a budget agreement will require new federal revenue to offset other costly priorities.

PBGC premium increases are “in play” and could well be included in the final recommendations. The exact amount of these increases is still unclear. The American Benefits Council reports hearing that over the 10-year budget period, the increase could be in the $6 billion to $16 billion range, but the numbers can change on a day to day basis.

In addition, it is possible that the premium increase will be based on the financial soundness of the plan sponsor. Both the Senate Democrats’ budget blueprint and the White House have suggested establishing risk-based premiums for companies with underfunded pension plans.

In a November 15 news release, Council President James Klein stated that raising PBGC premiums “would further discourage plan sponsors from remaining in the system when the current low interest rate environment is already forcing employers to pour more money into plans that may never be needed. As more companies are forced to exit the system, the universe of plans from which premiums are collected further shrinks. That certainly does not serve the PBGC’s interests.”

It may not serve your interests either. As pension plans become more costly to fund (a low interest environment and now possible increasing PBGC premiums) more sponsors are going to be forced to assess their viability… that’s your pension going out the window.

Here’s your chance to speak up. Contact your members of Congress and tell them “Budget agreements should not include revenue items that have the unintended consequence of providing more incentives for employers to discontinue sponsoring defined benefit pension plans because of increasing costs such as higher PBGC premiums” You can reach your members of Congress using this tool.