Congress Funds Budget Deal with Higher Pension Premiums
The sweeping two-year budget package
that is swiftly moving through Congress this week collects
over $8.1 billion in revenue from America’s defined benefit plans. This revenue largely comes from increases in premium payments to the Pension Benefit Guaranty Corporation (PBGC).
The pension section of the legislation has three provisions that increase PBGC premium collections. The most straight forward provision will increase the flat and variable rates that PBGC charges for single-employer pension plans through 2019. These increases come on top of past increases in both the flat and variable rates that were included in federal legislation enacted in 2005, 2012 and 2013.
For the current plan year, all plans are charged a flat rate of $57 per head with an added variable rate charge for underfunded plans of $24 per $1,000 that a plan is underfunded (capped at a total of $418 per head). In 2016, these rates are already scheduled to increase to $64 per head on the flat rate and $30 per $1,000 on the variable rate (capped at $500 per head). The bill will further increase these rates in 2017, 2018 and 2019 to $69 per head in 2017, $74 per head in 2018, and $80 per head in 2019 (rates will be indexed to inflation after that). The variable rates will increase to $33 per $1,000 in 2017, $37 per $1,000 in 2018, and $41 per $1,000 in 2019 (also indexed to inflation thereafter with the cap remaining at $500 per head). This provision will raise over $4 billion in the 10 year budget window.
Another provision accelerates the due date of PBGC premium payments from Oct. 15 to Sept. 15 for the 2025 plan year only. This provision raises over $2.5 billion in the 10-year budget window (currently calculated from 2016-2025) because the federal government’s fiscal year ends on Sept. 30, thereby allowing the revenue from the payments to be captured “a year early.”
The third provision extends the current 10% interest rate corridor used to value DB pension plan liabilities for three more years. The 10% interest rate corridor has been in effect since 2012 but was scheduled to widen by 5% per year starting in 2018 (until the corridor hits 30% in 2021). The provision delays this process through 2020 at which point the corridor will begin to widen again at the same rate.
This provision will raise over $1 billion in 10 years for two reasons. The first is that employers will not have to fund their plans as much with the narrower interest rate corridor. The second is because if employers are not funding their plans as much, then more plans will be subject to PBGC variable rate charges due to underfunding.Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.