US Budget Raising Pension Premiums?

David Wessel of the WSJ reports, Budget Would Raise Pension-Insurance Cost:

President Barack Obama's budget proposes to raise premiums the Pension Benefit Guaranty Corp. charges employers by $16 billion over ten years and, in a significant policy shift, would levy higher premiums on the riskiest companies.

The PBGC insures defined-benefit pension plans, those that promise a monthly sum based on years of service and wages. Its $80 billion portfolio, mainly assets of pension plans it has taken over, is $23 billion short of the current value of pensions it has promised to pay. Premiums are supposed to make up the difference. Total premium revenues last year were $2.2 billion.

Both the fiscal commission appointed by Mr. Obama and another, private one recommended increasing PBGC premiums to close the long-run deficit. "Premiums are much lower than what a private financial institution would charge for insuring the same risk, but unlike private insurers (or even other similar agencies, such as the Federal Deposit Insurance Corp.), the PBGC is unable to adjust the premiums it assesses…to cover potential liabilities," the Obama-appointed commission said in its report. "This has led to chronic and severe underfunding of the agency."

Rather than seeking a simple increase, the administration is asking Congress to give the PBGC authority to fashion a new approach in which premiums would be linked to the financial health of the employer sponsoring the underlying pension plan.

Currently, two similarly funded pension plans, one sponsored by a well-financed company and another sponsored by a shaky one, pay the same premiums even though the latter is at much greater risk of sticking the PBGC with its pension promises. Under the proposal, the agency could charge the latter company a higher premium. The approach resembles one used to price bank-deposit insurance. Since 2007, the FDIC has grouped banks into four categories and charged riskier ones higher premiums.

Under the Obama proposal, the changes wouldn't take effect for two years—at the earliest—to give the agency time to devise the new system and go through a formal rule-writing process. Among big issues to be resolved are the factors to use in assessing the riskiness of the employers and how much more to charge riskier companies. About one-third of employers whose pensions are insured by the agency have credit ratings below investment-grade; they would be hit harder by the premium increases.

"This proposal is both good government and better for business," said PBGC Director Joshua Gotbaum. "It protects retirement security while encouraging and rewarding responsible business behavior."

Some employers and unions are concerned higher premiums would lead businesses to freeze or even terminate pension plans. The American Benefits Council, which lobbies for big companies with defined-benefit pension plans, said it would carefully examine the plan to boost premiums and make the riskiest companies pay more.

"The employer community and the Obama Administration share a common goal of helping sponsors of defined benefit pension plans maintain those plans," Council President James A. Klein said in an email. "We want to understand how this idea either resembles or differs from past proposals regarding linking premiums to creditworthiness."

The group recently complained to Congress about PBGC rules and its approach to businesses. "Employers are fleeing the defined-benefit-plan system…they are freezing their plans, and…certain well-intended PBGC policies can actually threaten business viability and increase PBGC liability," the council's Ken Porter testified in December.

Of workers with defined-benefit plans, 22% are in plans that have been closed to new workers or ceased accruing benefits for some or all participants, the Labor Department says.

The collapse of several big pension plans has increased the PBGC's long-term deficit in recent years. In the past, Congress has raised premiums after the agency reported big deficits. The last time, in 2005, Congress lifted the premium on single-employer plans from $19 a worker annually to $30 and indexed it to inflation. Today, the current basic premium is $35. With various add-ons for underfunded plans, the average premium is close to $65.

The PBGC was created in 1974 after some workers lost pensions altogether when their employers went under. It guarantees basic benefits for 44 million American workers and retirees with defined-benefit pensions, a shrinking fraction of the work force, and is currently responsible for paying current or future pensions for about 1.5 million. The Labor Department says about half of all private-sector workers participate in employer-sponsored retirement plans of any sort, and, of those, an increasing majority have 401(k) or other defined-contribution plans, which aren't covered by PBGC insurance. Government employees are more likely to have defined-benefit pensions, but their pensions generally aren't covered by PBGC insurance.

The president's fiscal commission, led by former Clinton White House Chief of Staff chief Erskine Bowles and former Sen. Alan Simpson (R., Wyo.), recommended PBGC premiums increase by $16 billion over 10 years, the same as the new Obama budget. A private deficit-reduction panel, chaired by former Sen. Pete Domenici (R., N.M.) and former Clinton budget chief Alice Rivlin, proposed a 15% increase in the basic premium, among other changes. It recommended that premiums for underfunded plans be linked to the riskiness of their investment portfolios.

Timothy Inklebarger of Pensions & Investments reports, PBGC could increase premiums under budget proposal:

The Pension Benefit Guaranty Corp. would be given new authority to increase premiums on the retirement plans it insures, saving the agency an estimated $16 billion over the next decade, under President Barack Obama’s fiscal year 2012 federal budget proposal released Monday.

The PBGC’s pension insurance system is underfunded by about $23 billion, with about $80 billion in assets and $103 billion in liabilities, but is currently unable to adjust premiums to reflect a company’s financial condition or risk to its retirement plans, PBGC spokesman Jeffrey Speicher said in a telephone interview.

“This will both encourage companies to fully fund their pension benefits and ensure the continued financial soundness of PBGC,” according to the budget proposal for the fiscal year beginning Oct. 1.

PBGC Director Joshua Gotbaum said in a telephone interview that, previously, Congress has raised the premiums across the board, regardless of the financial stability of a company or its retirement plan. (Congress most recently raised the premium in 2005 to $30 a year per employee and indexed it to inflation bringing the current premium to about $35 a year per employee.)

Under the proposal, the increases would be at the discretion of the PBGC, similar to the model used by the Federal Deposit Insurance Corp.

Mr. Gotbaum said the proposal also aims to phase in the increases, so companies are not hit all at once. The phase-in would “avoid hitting pension plans hardest when the economy is at its worst,” he said.

Mr. Gotbaum noted the proposed change in giving the PBGC authority would take at least two years to study the PBGC before it could be implemented.

The budget also resurrects two proposals from the fiscal year 2011 budget that were not adopted. One establishes mandatory automatic workplace pensions and another would double the tax credits available to small companies for establishing or administering a new retirement plan.

The automatic workplace pension proposal would require employers that do not offer a retirement plan to automatically enroll employees in a direct-deposit IRA account. Employees would be allowed to opt out of the plan.

The tax credit proposal for establishing a retirement plan would double the credit up to a maximum of $1,000 a year from $500 for three years for the startup expense of establishing or administering a new retirement plan. The proposal aims to “make it easier for small employers to offer pensions to their workers in connection with the automatic IRA proposal,” according to the budget proposal.

The budget reduces spending at the Department of Labor by 5% from 2010 spending levels to $12.8 billion. The Labor Department’s Employee Benefits Security Administration’s budget would be $198 million in fiscal year 2012, up 22% from fiscal year 2011 and up 28% from fiscal year 2010.

In fiscal 2010, the PBGC reported a $23 billion deficit, near its all-time high of $23.5 billion in fiscal 2004. The US government is right to introduce new proposals to deal with this deficit. If the PBGC is unable to pay pension promises it insures, taxpayers are on the hook. Premiums should be linked to the financial health of the company (plan sponsor) and increases phased in to avoid hitting pensions that got clobbered during the recession.