US Budget Raising Pension Premiums?
David Wessel of the WSJ reports, Budget Would Raise Pension-Insurance Cost:
Barack Obama's budget proposes to raise premiums the Pension Benefit
Guaranty Corp. charges employers by $16 billion over ten years and, in a
significant policy shift, would levy higher premiums on the riskiest
The PBGC insures
defined-benefit pension plans, those that promise a monthly sum based
on years of service and wages. Its $80 billion portfolio, mainly assets
of pension plans it has taken over, is $23 billion short of the
current value of pensions it has promised to pay. Premiums are supposed
to make up the difference. Total premium revenues last year were $2.2
Both the fiscal commission appointed by Mr. Obama and
another, private one recommended increasing PBGC premiums to close the
long-run deficit. "Premiums are much lower than what a private
financial institution would charge for insuring the same risk, but
unlike private insurers (or even other similar agencies, such as the
Federal Deposit Insurance Corp.), the PBGC is unable to adjust the
premiums it assesses…to cover potential liabilities," the
Obama-appointed commission said in its report. "This has led to chronic
and severe underfunding of the agency."
than seeking a simple increase, the administration is asking Congress
to give the PBGC authority to fashion a new approach in which premiums
would be linked to the financial health of the employer sponsoring the
underlying pension plan.
Currently, two similarly
funded pension plans, one sponsored by a well-financed company and
another sponsored by a shaky one, pay the same premiums even though the
latter is at much greater risk of sticking the PBGC with its pension
promises. Under the proposal, the agency could charge the latter
company a higher premium. The approach resembles one used to price
bank-deposit insurance. Since 2007, the FDIC has grouped banks into
four categories and charged riskier ones higher premiums.
the Obama proposal, the changes wouldn't take effect for two years—at
the earliest—to give the agency time to devise the new system and go
through a formal rule-writing process. Among big issues to be resolved
are the factors to use in assessing the riskiness of the employers and
how much more to charge riskier companies. About one-third of employers
whose pensions are insured by the agency have credit ratings below
investment-grade; they would be hit harder by the premium increases.
proposal is both good government and better for business," said PBGC
Director Joshua Gotbaum. "It protects retirement security while
encouraging and rewarding responsible business behavior."
employers and unions are concerned higher premiums would lead
businesses to freeze or even terminate pension plans. The American
Benefits Council, which lobbies for big companies with defined-benefit
pension plans, said it would carefully examine the plan to boost
premiums and make the riskiest companies pay more.
community and the Obama Administration share a common goal of helping
sponsors of defined benefit pension plans maintain those plans,"
Council President James A. Klein said in an email. "We want to
understand how this idea either resembles or differs from past proposals
regarding linking premiums to creditworthiness."
recently complained to Congress about PBGC rules and its approach to
businesses. "Employers are fleeing the defined-benefit-plan system…they
are freezing their plans, and…certain well-intended PBGC policies can
actually threaten business viability and increase PBGC liability," the
council's Ken Porter testified in December.
workers with defined-benefit plans, 22% are in plans that have been
closed to new workers or ceased accruing benefits for some or all
participants, the Labor Department says.
The collapse of several
big pension plans has increased the PBGC's long-term deficit in recent
years. In the past, Congress has raised premiums after the agency
reported big deficits. The last time, in 2005, Congress lifted the
premium on single-employer plans from $19 a worker annually to $30 and
indexed it to inflation. Today, the current basic premium is $35. With
various add-ons for underfunded plans, the average premium is close to
The PBGC was created in 1974 after some workers lost
pensions altogether when their employers went under. It guarantees
basic benefits for 44 million American workers and retirees with
defined-benefit pensions, a shrinking fraction of the work force, and
is currently responsible for paying current or future pensions for
about 1.5 million. The Labor Department says about half of all
private-sector workers participate in employer-sponsored retirement
plans of any sort, and, of those, an increasing majority have 401(k) or
other defined-contribution plans, which aren't covered by PBGC
insurance. Government employees are more likely to have defined-benefit
pensions, but their pensions generally aren't covered by PBGC
The president's fiscal commission, led by former
Clinton White House Chief of Staff chief Erskine Bowles and former Sen.
Alan Simpson (R., Wyo.), recommended PBGC premiums increase by $16
billion over 10 years, the same as the new Obama budget. A private
deficit-reduction panel, chaired by former Sen. Pete Domenici (R.,
N.M.) and former Clinton budget chief Alice Rivlin, proposed a 15%
increase in the basic premium, among other changes. It recommended that
premiums for underfunded plans be linked to the riskiness of their
Timothy Inklebarger of Pensions & Investments reports, PBGC could increase premiums under budget proposal:
Pension Benefit Guaranty Corp. would be given new authority to
increase premiums on the retirement plans it insures, saving the agency
an estimated $16 billion over the next decade, under President Barack
Obama’s fiscal year 2012 federal budget proposal released Monday.
PBGC’s pension insurance system is underfunded by about $23 billion,
with about $80 billion in assets and $103 billion in liabilities, but is
currently unable to adjust premiums to reflect a company’s financial
condition or risk to its retirement plans, PBGC spokesman Jeffrey
Speicher said in a telephone interview.
will both encourage companies to fully fund their pension benefits and
ensure the continued financial soundness of PBGC,” according to the
budget proposal for the fiscal year beginning Oct. 1.
Director Joshua Gotbaum said in a telephone interview that, previously,
Congress has raised the premiums across the board, regardless of the
financial stability of a company or its retirement plan. (Congress most
recently raised the premium in 2005 to $30 a year per employee and
indexed it to inflation bringing the current premium to about $35 a
year per employee.)
proposal, the increases would be at the discretion of the PBGC, similar
to the model used by the Federal Deposit Insurance Corp.
Gotbaum said the proposal also aims to phase in the increases, so
companies are not hit all at once. The phase-in would “avoid hitting
pension plans hardest when the economy is at its worst,” he said.
Gotbaum noted the proposed change in giving the PBGC authority would
take at least two years to study the PBGC before it could be
The budget also resurrects two proposals from the
fiscal year 2011 budget that were not adopted. One establishes mandatory
automatic workplace pensions and another would double the tax credits
available to small companies for establishing or administering a new
The automatic workplace pension proposal would
require employers that do not offer a retirement plan to automatically
enroll employees in a direct-deposit IRA account. Employees would be
allowed to opt out of the plan.
The tax credit proposal for
establishing a retirement plan would double the credit up to a maximum
of $1,000 a year from $500 for three years for the startup expense of
establishing or administering a new retirement plan. The proposal aims
to “make it easier for small employers to offer pensions to their
workers in connection with the automatic IRA proposal,” according to the
The budget reduces spending at the Department
of Labor by 5% from 2010 spending levels to $12.8 billion. The Labor
Department’s Employee Benefits Security Administration’s budget would be
$198 million in fiscal year 2012, up 22% from fiscal year 2011 and up
28% from fiscal year 2010.
In fiscal 2010, the PBGC reported a $23 billion deficit,
near its all-time high of $23.5 billion in fiscal 2004. The US
government is right to introduce new proposals to deal with this
deficit. If the PBGC is unable to pay pension promises it insures,
taxpayers are on the hook. Premiums should be linked to the financial
health of the company (plan sponsor) and increases phased in to avoid
hitting pensions that got clobbered during the recession.