PBGC Premiums: Faux Budget Padding?
Premiums paid to the Pension Benefit Guaranty Corporation (PBGC) are an important concern for DB plans, their administrators and their sponsors. And an increasing concern at that, since they grow and grow. But there are questions regarding what exactly that money is going toward.
In Findley Davies’ April 2017 issue of Pension Indicator
, Matthew Klein discusses
the premiums and what the PBGC does with the money, and argues that PBGC premiums offer faux windfall for federal budget purposes. And Klein is not alone in that view.
The flat-rate premium started at $1 per participant when premium insurance began in 1974. In plan years beginning in 2017
, the per-participant flat premium rate is $69 for single-employer plans (up from a 2016 rate of $64) and $28 for multiemployer plans (up from a 2016 rate of $27). For plan years beginning in 2017, the variable-rate premium (VRP) for single-employer plans is $34 per $1,000 of unfunded vested benefits, up from a 2016 rate of $30. For 2017, the VRP is capped
at $517 times the number of participants (up from a 2016 cap of $500). Plans sponsored by small employers (generally fewer than 25 employees) may be subject to a lower cap.
According to Klein, PBGC premiums have climbed 128% just since 2012. And that is outstripped by the variable-rate premium, which he notes has grown by a whopping 367% since 2013.
“Ask just about anyone that works with DB plan sponsors on a regular basis, and they are likely to tell you that management of PBGC premiums is the single-biggest current client concern,” writes Klein. Octoberthree, in “The PBGC Premium Burden: What Every Pension Sponsor Needs to Understand
” (registration required), says, “PBGC premiums have gone from being an afterthought for many plan sponsors to a mounting cost that must be managed better. Now, for many sponsors, these premiums represent the single biggest source of pension overhead cost and a major obstacle to successful pension management.”
That translates to large amounts in dollar figures. Octoberthree says that the amount premiums have brought in more than tripled from $2.1 billion in 2011 to $6.4 trillion in only five years. And more is to come, according to Octoberthree, which says premium rates will grow by another 25%-50% by 2019.
In Octobertree’s view plans themselves are in part to blame for how much they are paying. In 2015 alone, Octoberthree says, plan sponsors forked over $145 million that they didn’t have to if they had done a better job of understanding and optimizing the rules for recording and timing plan contributions. Further, it says, more than $700 million in potential premium were foregone during the period 2009-2015.
What Premiums Pay for
High or not, those premiums are intended to provide insurance for pension plan funds. That’s part of the deal: annual premiums are not optional, but in return plans and plan participants have the security of knowing that even if the plan sponsor is unable to make good on promised benefits, vested benefits still will be issued.
Which is straightforward enough. But things aren’t always as simple as they seem, and that’s even more likely to be the case when large amounts of money are involved.
Those billions are tempting in a time when federal budgets balloon and there is pressure to cover expenditures, or at least make the books look good on paper. “In recent years, Congress has been treating PBGC premiums like a piggy bank and single employer premiums are far higher than they should be as a result,” says Judy Miller
, Executive Director of the ASPPA College of Pension Actuaries (ACOPA).
Klein is among those who argue that PBGC premiums end up serving purposes beyond what was intended. “PBGC premiums have become a popular source of finding ‘tax’ revenue in order to pay for other, non-retirement projects,” says Klein.
This, Klein posits, “is because these premiums are an easy target because they aren't ‘taxes,’ they are premiums,” an approach he says is “built on faulty logic” because “the increases in PBGC premiums do not go to the federal government at all; they are property of the PBGC itself.”
The result of that approach, says Rep. Jim Renacci (R-Ohio) in a press release
, is that “Under current law, pension insurance premiums that are paid by employers to the Pension Benefit Guaranty Corporation (PBGC) are included in the federal budget and are considered ‘on-budget.’ This provides the illusion this revenue can be used for general government spending, even though these premiums cannot be allocated to other government programs besides the PBGC benefit pension plans.”
On April 15, 2016
, Renacci introduced H.R. 4955
; on July 14, 2016, Sen. Mike Enzi (R-Wyo.) introduced a companion bill (S. 3240) in the Senate. Both bills, which would have changed the treatment of PBGC premiums so they are no longer counted as general fund revenue, died in committee as the 114th Congress wrapped up its work and the 115th Congress took office.