Not too long ago, sponsors of defined benefit plans regardedpremium payments to the Pension Benefit Guaranty Corp. like a trip to the dentist — arequired nuisance.

“The tendency was to take a compliance mindset to PBGC premiumsand pension plan funding,” says Brian Donohue, a partner andactuary at Chicago-based pension consultancy October Three.

In other words, premium payments were seen as a necessary costof doing business for employers offering defined-benefit plans — dowhat you have to do to pay what has to be paid and get the problemoff sponsors' desks until the next round of premiums are owed.

But that so-called compliance mindset has lulled some pensionsponsors into a pattern of complacency, resulting in upwards of$700 million in PBGC premium overpayments between 2009 and 2016, accordingto a newstudy authored by Donohue and his team at October Three.

Premium payments have become an increasingly expensive fixedcost for pension sponsors. In 2003, pension sponsors with a singleplan paid about $1 billion in premiums to PBGC, but rate increasesmandated by Congress have exploded that figure. In 2011, PBGC tookin $2.1 billion in premium payments for single-plan pensionsponsors. By 2016, premium revenue was $6.4 billion.

And another 25% to 50% increase is scheduled between now and2019.

“PBGC premiums now dwarf the other operational costs ofsponsoring a pension plan,” said Donohue. “If a sponsor is hopingfor a 6% or 7% return on pension assets, and they are paying 1% ofassets to PBGC premiums, that is considerable problem.”

October Three estimates that in 2015, $145 million in premiumoverpayments were concentrated among roughly 3,000 plans with atleast 250 participants.

The reason for the overpayments can be found in the bowels ofwhat Donohue calls “esoteric” pension accounting andpremium assessment rules. Jumbo pensions tend to have the internalresources to sift through the rules and apply them to theiradvantage.

But small and midsize plans are often left to their own limiteddevices, and many may not be receiving best practice services fromsome pension consultants.

“We don't see the problem as being the fault of plansponsors—this is an area where they really have to rely on theirservice providers,” said Donohue. “Among jumbo plans, we tend tosee best actuarial practices applied. But a lot of smaller plansare definitely missing opportunities.”

Under plan accounting rules, sponsors can minimize PBGC premiumsby maximizing “grace period” cash contributions to a plan, orcontributions that are allowed after the end of a plan year but arestill attributable to that year.

To the layman, that may sound a bit wonky, and perhaps explainswhy some sponsors are not taking full advantage of how to time andreport cash contributions to their plans.

But in the actuarial world, “there is nothing new in thesetechniques,” explained Donohue. “It's not as if this is secretknowledge consultants don't know about.”

In the case of some plans reviewed by October Three, allquarterly funding contribution requirements could have been appliedas grace period contributions, but were not. The result is thatthose plans reported lower plan asset values than they could have,causing them to pay higher PBGC premiums than needed.

In one glaring example from the data October Three pulled fromopen-source Form 5500 information, a pension with $330 million inassets and 8,300 participants paid a variable rate premium of $2.9million in 2015. But the plan did not record its contributionsunder the grace period rule, resulting in an overpayment of$685,000 in PBGC premium. While complex to the naked eye, anactuary could have recorded the adjustments in a matter of minutes,according to October Three. Actuarial fees paid to the plan'sconsultant in 2015 were $160,000.

“Any sponsor experiencing recording errors is likely not beingtold the opportunity exists by their actuary and, in turn, ismissing an opportunity to reduce their PBGC premium,” the reportnotes.

Beyond recording errors, some sponsors are missing theopportunity to reduce premium liability by acceleratingcontributions to plans. Over time, October Three says that strategyresults in insignificant funding costs that are more than paid forby savings in PBGC premiums.

Skyrocketing premiums are forcing more sponsors—and actuaries—toapply best practice accounting standards to control premium risk.But October Three's evidence suggests that at least half of plansponsors without best practices in place are overpaying anaggregate of $100 million in annual PBGC premiums.

The bottom line from Donohue's vantage is a set-it-and-forget itapproach to funding strategies will continue to negatively impactPBGC rates for many sponsors, as premiums continue to increasebetween now and 2019.

Sponsors need to be engaging consultants on an annual basis—at aminimum—on whether they are applying the most beneficial fundingand documentation strategies to their plan, Donohue said. “We knowthere are sponsors out there that are not getting the service theyshould be getting.”

The good news for sponsors is that deeper access to data andtransparent analysis of best-in-class accounting procedures can beexpected to be a “big leveler” for all plans, no matter their size,he said. “Sponsors should be expecting more, and not feel at themercy of their service providers.”

BenefitsPro