By Mike Clark, Consulting Actuary, the Principal Financial Group
You can forgive sponsors of single-employer defined benefit (DB) plans if they mistakenly think the Pension Benefit Guaranty Corporation (PBGC) insurance program is in financial distress. Premium levels have quintupled since the passage of the Pension Protection Act in 2006 after all, which may give those paying the impression that the organization collecting actually needs the money.
But the truth is that the PBGC single-employer insurance program is flush with cash according to their own 2019 Fiscal Year Projections Report. The single-employer program had a surplus of $8.7 billion on September 30, 2019, and the balance sheet future looks pretty bright. The median projected surplus in ten years is $46 billion.
Time for a “Tax” Cut?
No one disputes that a healthy reserve asset for a large insurance program covering tens of millions of American pensions is a good thing. The question is, “How much cushion is really needed?”
From a plan sponsor perspective, the premiums are essentially a tax — one that seems to provide no direct benefit to the payors unless they go bankrupt and leave their plans to the PBGC. While this may have been seen as a reasonable expense when premiums were lower and PBGC ink ran red, sponsors now wonder why their levies need to be so high. Government surpluses traditionally suggest tax reductions, not further increases.
Act of Congress
There may actually be folks at the PBGC who agree a premium reduction is appropriate. The problem is that the PBGC doesn’t directly control the premium level charged; this requires an act of Congress.
Someday an opportunity may arise to craft reasonable premium relief without causing unnecessary risk to the PBGC and beneficiaries paid by them. Therefore, I optimistically offer two suggestions for potential changes, neither of which requires a direct reduction of current premium rates.
- Stop Indexing! PBGC flat rate and variable rate premiums are both indexed to inflation. So the $83 per person flat premium will increase a few bucks each year with the cost of living. Inexplicably, the variable rate premium of 4.5% of unfunded liability is also indexed, which is offensive from a purely mathematical perspective since percentages are already indexed! Indexing a percentage is in fact double-indexing, which left unchecked would eventually lead to a premium equal to 100% of the unfunded liability. (A headcount based cap on the variable rate premium was added several years ago, likely in recognition of this incongruity.)
- Offset Premiums with Extra Plan Contributions. Since the PBGC’s mission is to protect participants in underfunded plans, perhaps their main focus should change from collecting surplus assets to improving the funding positions of the plans themselves. Reducing annual premiums by the value of sponsor contributions in excess of minimum requirements would provide an incentive for employers to improve the funding of their own plans to avoid the premium tax. (Most I know would contribute $2 or $3 extra to save $1 in premiums.) Sure, PBGC revenues would decline, but so could the projected outlays for future failing plans as funding ratios improve.
Maintain Single-Employer Program Purity
Of course, these suggestions only work if the single-employer program is looked at in isolation. One of the reasons sponsors may mistakenly think their program is in dire financial straits is that the PBGC multiemployer program just over the wall actually is. (Results are in the same PBGC report.)
The multiemployer program posted a deficit of $66 billion this year and is projected for certain insolvency by fiscal 2027 without some type of bailout. Political temptation will be great to tap the single-employer surplus to fill the multiemployer sinkhole.
That is currently illegal, but sponsors of single-employer plans should remain vigilant. Their significantly higher premiums have put one PBGC insurance program on sound financial footing, so the first use of this inconvenient surplus should be to reduce plan sponsors’ tax-like burden.
Mike Clark is a fellow of the Society of Actuaries (SOA) and a member of the American Academy of Actuaries (AAA) since PBGC premiums were $19 per person plus 0.9% of unfunded liabilities.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services are provided through Principal Life Insurance Company, a member of the Principal Financial Group®, Des Moines, IA 50392.