(MEP) PBGC premium hikes to affect jobs, economy

A new proposal to raise Pension Benefit Guaranty Corporation premiums to the tune of $25 billion over the next decade for companies that offer defined benefit pension plans is being contested. Not surprisingly, many in charge of administering their company’s pension benefits see the increase as crippling to their industry and the economy.

The most recent PBGC proposal, coupled with a $9 billion premium increase in 2012 and an $8 billion increase in 2013, fiduciaries of employer-sponsored pension plans see the proposal as a supplemental tax hike or cost to operating budgets that will essentially limit a company’s ability to stay competitive.

The Pension Coalition, a group of more than 100 trade and professional organizations and private sector companies that provide retirement benefits, finds in a recent study that the proposed increases will have a negative $51.4 billion hit to the U.S. economy over 11 years. Also, PBGC premium increases are projected to eliminate 42,000 jobs per year, with a peak of 67,000 jobs lost in 2017, the coalition finds. 

“This latest proposal goes too far,” says Etta Strong, director of benefits at Owens-Illinois, a company that manufactures glass containers. “For O-I, it’s simple: the more money we are required to spend on PBGC premiums is less money we have to spend on something else, whether it is our own pension funds, our capital investments that strengthen our competitive and strengthen our economy.”

Currently, O-I has more than 5,000 employees in the U.S, but has more than 38,000 participants in its nearly 100% funded DB pension fund, Strong says.

PBGC director Josh Gotbaum said in a statement that the agency agrees that premiums need to be reformed. He notes that prior Congressional increases have underfunded the PBGC.

“It’s important to understand that this administration and the previous one supported premium reforms,” Gotbaum said. “The President's proposal would allow PBGC’s board to both raise and lower premiums in a way that is fair, affordable, and preserves pensions.”

Quad/Graphics, a leading global printer and media channel integrator, finds itself in the same boat as O-I, struggling to fund its pension promises while dealing with increasing PBGC premiums. The company’s premiums increased to $2.4 million in 2012 and are projected to reach $4.7 million in 2016. Trying to fund its pension promises has limited the company’s ability to “stay functional in a very mature marketplace and very competitive marketplace,”says Pat Henderson, director of government affairs at Quad/Graphics.

Even worse, Mike Pollack, a senior consulting actuary at global professional services company Towers Watson, believes this expected bump in premiums is not warranted as the benefits of past increases have not been realized.

“The deficit doesn’t reflect the substantial increases in premiums that have occurred and are scheduled to occur through 2016,” Pollack explains. “It only looks at the current assets and obligations. The two rounds of premiums that have been enacted in recent years are expected to address more than half of the current deficit, assuming that they don’t erode the premium base.”

While referencing that PBGC has actually seen a decrease in reported deficits to $27.4 billion in 2013, Pollack notes that these assumptions may change when the real results of interest rates, discount rates, life expectancy tallies, as well as the rate of investment return on its portfolio, are seen.

“There’s going be good years and bad years and it’s going to cause the deficit to go up and down,” Pollack explains. “While no one knows for sure that experience will cause an overall increase or decrease, it seems much more likely to me that there’s going to be a long-term decrease in the deficit because interest rates are far below historical levels, and an increase in interest rates will drive down the deficit.”

In the meantime, plan sponsors will continue to explore ways to escape the billowing administrative costs associated with pension plan sponsorship. These include offering lump sum payments to former employees, or considering terminating their plans and “getting out of the game,” Pollack says.

“It increases the ongoing costs of the plan,” Pollack explains. “[Companies] have to make decisions about the cost structure of their pension plans. These just add to the cost structure [so] they exit and provide another kind of employee benefit plan.”

Source: Employee Benefit Adviser