Employers Consider Reducing Size of Pension Plans Due to Increases in PBGC Premiums

Sharply rising Pension Benefit Guaranty Corp. insurance premiums are leading more employers to consider approaches to reduce the size of their pension plans, according to a new survey.

When asked if they intended to change their pension plans due to legislation Congress passed in 2015 sharply raising PBGC premium rates over a three-year period, 45 percent of respondents said they are considering offering participants the option to convert their monthly annuity benefit to a cash lump sum, according to the survey released Wednesday by Boston-based investment consultant NEPC L.L.C.

After taking a lump sum, affected individuals no longer are in the pension plan, reducing the so-called flat rate PBGC premium — the total amount based on number of plan participants — paid by employers.

In addition, 27 percent of respondents said they are considering transferring pension benefit obligations to insurers through the purchase of group annuities.

That approach also reduces the flat rate PBGC premium and, by reducing plan liabilities, cuts backs an employer’s exposure to the PBGC’s variable rate premium, which is based on the amount of plan underfunding.

Twenty-five percent of respondents said that due to higher PBGC premiums, they are considering boosting contributions to their pension plans, reducing or even eliminating the PBGC variable-rate premium that employers with underfunded plans are assessed.

Thirty-nine percent said they were not considering making any changes at this time.

Under the 2015 law, the current PBGC base $64 per participant premium will rise over a three-year period until it hits $80 in 2019, while the variable rate premium — now $30 per $1,000 of plan underfunding — will increase to $41 in 2019.

Those rate hikes are supposed to generate an additional $4 billion in premium income for the PBGC through the end of 2025.

ERIC has strongly opposed PBGC premium increases, warning that the rate hikes are harmful to plan sponsors, participants and the nation’s pension system.

The NEPC survey, conducted in August is based on the responses of 184 employers, whose defined benefit plans have $280 billion in assets.