US Defined-Benefit Pensions At Risk?
Friday, February 18, 2011

A proposal in President Obama's 2012 Budget giving the Pension Benefit Guaranty Corporation freedom to set its own insurance premiums based on risk has prompted warnings that companies will be more inclined in future to freeze or terminate employee defined-benefit pension plans.

The PBGC is a federal corporation that guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 27,500 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues and therefore its operations are financed entirely by insurance premiums paid by companies that sponsor pension plans and from the assets and recoveries on behalf of plans that have been assumed by PBGC.

The proposal, contained in the President's FY2012 budget, would allow the PBGC to set its own premiums based on the financial health of the premium payer and the circumstances of the individual plan. Historically, Congress has raised PBGC premiums by legislation, but has generally not taken the individual circumstances of different company sponsors into account. As a result, the PBCG argues, financially sound companies are forced to subsidize those that are not.

The PBCG is currently in deficit to the tune of USD23bn and has run a deficit for all but six years since its creation in 1974. The Corporation says that it has sufficient funds to cover current liabilities, but with such a large shortfall to cover, there are fears that it may not have the funding to cover future pension payouts, and the administration's proposal may go some way to ensuring that the PBCG has enough money in the pot to survive. A similar proposal was included in the report of the President's fiscal commission, released last year, in which it was noted that the PBGC charges much lower insurance premiums than those charged by private insurers.

In 2005 Congress raised the premium on single-employer plans from USD19 per worker annually to USD30, at the same time indexing the premium to inflation. Today, it stands at USD35 per worker. The finer details of the Presidents proposal have still to be fleshed out, for example the risk model upon which the PBGC will base its premium levels. The President's proposal also directs the PBGC to set premiums in such a way as to avoid increases when the economy is weak. However, critics of the proposal warn that companies in a financially-unhealthy situation would merely freeze their plans when faced with higher premium payments, meaning that the PBCG may receive less income than more.

Testifying before the Senate Health, Education, Labor and Pensions (HELP) Committee in December, Ken Porter, an Actuarial and International Benefits Consultant for the American Benefits Council, an organization which represents the PBGC’s customers who pay the premiums that support the agency, suggested that "certain well-intended PBGC policies and actions can actually threaten business viability and increase PBGC liability."

"The core problem we see is that PBGC and the business community need to communicate more effectively about why employers are fleeing the defined benefit plan system, why they are freezing their plans," he told the panel.

The new pension insurance proposal was modeled on the deposit insurance system operated by the Federal Deposit Insurance Corporation (FDIC). The FDIC has, for two decades, set its own premiums based on the circumstances and risks of individual banks. The PBGC notes, however, that the FDIC implemented its most recent premium structure "only after several years of careful study and consultation with the business community, labor, and other stakeholders." The PBGC would be required to undertake a similar process prior to implementing any changes. Furthermore, any changes would be required to be phased in over a period of years, it says.