The PBGC is Raising its Premiums Again

The ink was barely dry on the “Moving Ahead For Progress into the 21st Century Act” (aka MAP-21) before the Pension Benefit Guaranty Corp (PBGC) decided that it needed still more funding. Before the bulk of the MAP-21 PBGC premium increases took effect, the most recent budget deal is set to raise them even further.

As you are surely aware if you sponsor a traditional pension or defined benefit plan, the PBGC insures defined benefit pension plans from default. As the exodus from defined benefit plans has picked up steam, employers are shutting their defined benefit plans down and there are virtually no new ones starting up. In 1985 there were 112,000 defined benefit plans insured by the PBGC; in 2013 the number had dropped to 23,000. Increasingly, the PBGC covers a disproportionately risky pool and needs to raise its rates to keep up with projected default rates.

PBGC rates consist of two tiers – a flat per-participant rate and a variable rate based on the unfunded liability of the Plan. The flat rate is going from $42 per participant in 2013 to $49 on 2014; to $57 in 2015 and to $67 in 2016. The variable rate is going from 0.9% of the unfunded liability in 2013 to 1.4% in 2014; to 2.4% in 2015 and to 2.9% in 2016. The bottom line is that you should expect the amount you currently pay to the PBGC to increase by a minimum of 53%. If you are stuck with a significant unfunded liability, it may even double.

The rebound of the stock market may help the PBGC. Since the Plans covered by the PBGC consist of plans many of whom are heavily invested in the market, increasing plan assets means less likelihood of default.

It’s a bit ironic that the PBGC, whose slogan is “Protecting America’s Pensions”, finds itself in the same predicament that many of the plans which make up its risk pool. Its premiums are dollars taken directly from the pension plans thus driving the healthy ones out of the pool, and unhealthy ones further in the hole.

Please contact the Cover & Rossiter team, your Delaware CPAs, if you have questions about how you could affected.