Troubleshooting PBGC Premiums

A new white paper outlines some suggestions for easing the task of paying premiums to the Pension Benefit Guaranty Corporation (PBGC).

 

“PBGC premiums remain a major burden for pension sponsors,” says October Three in “The PBGC Premium Burden Report – 2020,” an analysis of the experience of approximately 5,000 U.S. pension plans that cover at least 250 participants.

Every plan the PBGC insures must pay premiums annually to the PBGC—either the flat-rate premium that applies to both single-employer and multiemployer plans, or the variable-rate premium that applies only to underfunded single-employer plans. In addition, a termination premium applies to certain distress and involuntary plan terminations. Each plan is responsible for calculating and paying its own premiums based on a reported participant count and, when required, plan funding information.

 

For 2020, the per-participant rate for flat-rate premiums for single-employer plans is $83, up $3 from the 2019 rate of $80. Variable rate premiums for those programs are $45 per $1,000 UVBs (unfunded vested benefits), with a per participant cap of $561. For 2019, those rates were $43 and $541, respectively. For multi-employer plans, the per-participant rate for flat-rate premium is $30, $1 higher than in 2019. The PBGC Premium Rates web page is here.

Longer-Term Trends

 

October Three observes that since 2008, single-employer plan sponsors alone have paid $46 billion in PBGC premiums. During 2019, they report, premiums sponsors of single-employer plans paid were 15% higher—almost $1 billion more—than what they paid in 2018. And October Three notes that for the roughly 24,000 single-employer plans subject to PBGC premiums during the period 2008-2019, premiums now are nearly five times larger than they were in 2008.

 

Further, the white paper says, the fixed rate premium more than doubled between 2010 and 2019, and doubled for the median plan as well. The variable rate premium (VRP), October Three says, fell in 2017 and 2018, but rose in 2019—and is now are five times what it was in 2010.

 

 

October Three has found that most employers address PBGC premiums by settling liabilities through lump sum offers and annuity purchases, and by making voluntary contributions; it expects that to continue—if not accelerate—this year.
In addition, they report, many employers have also adopted other, simpler strategies for reducing premiums. Those methods are based on:

 

Optimizing contribution recording and timing for PBGC purposes also can affect premiums, October Three says. Timing contributions to a plan after the end of the plan year but so that they still are attributable to that plan year is a means by which a plan can reduce the burden PBGC premiums impose, it adds. The white paper says that most plan sponsors rely on guidance regarding the timing of contributions, but that the frequent lack of that guidance results in many plans missing the opportunity to reduce premiums.

 

Some employers respond to the challenges premiums pose by reducing headcounts, funding and other best practices, October Three adds.

 

One of those other practices, October Three reports, is to move from the alternative to the standard method for calculating premiums. In 2019, they observed more than 100 employers move from the alternative to the standard method for calculating premiums, a strategy they say reduced 2019 premiums for some employers. And, writes October Three partner Brian Donohue, “This strategy is alive for 2020.”

 

But Donohue also notes that there is “a strong argument for electing the alternative method this year for plans that have been on the standard method for five years.” And the report says that in many cases, moving from the alternative to the standard method for calculating premiums can increase premiums this year by more than it reduced premiums for 2019.
 

“Sponsors that adopt a more strategic view with respect to these elections will avoid this result,” October Three says, suggesting that employers may find it useful to wait to make a decision regarding which to follow until closer to the deadline for making that choice, since that will allow one to access more information to inform that election. That deadline usually is Oct. 15 for calendar-year plans; however, this year the deadline has been extended to the end of 2020 at least. “We think this presents an opportunity for alert sponsors,” says October Three.

 

 

“For thousands of pension sponsors, sound pension management has become, in large part, management of PBGC premiums,” says Donohue, adding, “The PBGC premium burden remains a major threat to even the most carefully managed plans. For sponsors that have not adopted a vigorous strategy of managing these premiums, the situation is more challenging still.”