The new holiday season tradition: PBGC premium increases

Getting the holiday season off to a not-so-jolly start for corporate pension plans and their sponsors, the latest budget proposals from Congress include yet more increases to PBGC premiums.

A new holiday tradition: the ceremonial battering of the pension plan

Everyone has their favorite among the long-established list of holiday traditions that run from Halloween to the New Year: whether it’s candles and tinsel, football at Thanksgiving, or even Chinese food on December 25th, there’s something for everyone. For the U.S. congress, the latest addition to the list is the battering of corporate pension plans as part of the ritual pretense of balancing the budget.

When the Bipartisan Budget Act of 2013 first saw the light of day, I wrote that it “may well speed the DB system to its death bed.” And that was when we believed that the increase it contained was likely to be a one-off (apart, that is, from subsequent indexation to wage inflation.) But on the very same day that the agency confirmed the 2016 increases, a new Bipartisan Budget Bill appeared: 2015’s edition, if passed, would see flat rate premiums jump from 2016’s $64 per participant to $78 in 2019—that’s more than double the premium that was payable in 2012; and variable rate premiums would jump from 2016’s 3.0% of shortfall to 3.8% in 2019—that’s more than four times 2012’s rate.

Increasing the premium, but shrinking the premium base

Pension plan sponsors have already started to factor PBGC premiums into their decisions. These premiums are no longer a marginal consideration, but rather a material component of some decisions. High per-participant premiums encourage sponsors to reduce headcount by annuity buyouts or lump sum payments; high variable rate premiums encourage putting money into the plan (even if the corporation must borrow to do so); and both force plan sponsors to once again ask themselves if this whole DB thing is really such a good idea at all.

And with every plan sponsor who takes steps to reduce their premiums, more pressure is put on the remaining premium base. There’s even a danger of a vicious circle being created, with increasing premiums leading to more sponsors exiting the system, leading to a smaller base over which to spread the agency’s shortfall, leading to the need to increase premiums.

All of which will be leaving some plan sponsors feeling like their hearts are two sizes too small this year.

UPDATE: This gets sillier.  The latest version of the bill increases the number further to $80 per participant and 4.1% of the shortfall in 2019.