Another Factor in Favor of Pension Risk Transfers

Congress raised PBGC premiums substantially as part of the December budget deal, the second increase in the last few years.

As part of the budget deal approved in December, Congress increased the premiums that companies with pension plans pay to the Pension Benefit Guaranty Corp. (PBGC). The increases follow closely on the heels of premium hikes enacted as part of a transportation bill in 2011 (the Moving Ahead for Progress in the 21st Century Act, or MAP-21), and critics argue the higher premiums could lead more companies to lower the number of participants in their plans by buying annuities for some participants or offering lump-sum buyouts.

Plan sponsors pay the PBGC a flat premium on each participant in the pension plan; they also pay a variable premium if the plan is underfunded. The flat rate, which stood at $35 in 2012, will go from $49 this year to $57 in 2015 and $64 in 2016. The variable rate, which stood at $9 per $1,000 of unfunded benefits in 2012, will go from $14 per $1,000 this year to $24 in 2015 and $29 in 2016. Moreover, the per-participant cap on the variable-rate premium goes to $500 in 2016, up from $412 currently.

Driver of De-Risking, Not Closing Plans
Still, few see the premium increases convincing many companies to eliminate their pension plans.

The reasons that companies terminate plans include “getting large liabilities off their books and getting out of the longevity risk and investment risk that [pension plans] pose,” said Donald Fuerst, senior pension fellow at the Academy of American Actuaries. “PBGC premiums will always be on that list, but they’re relatively far down on that list, not that material.”

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