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Pension plan insurance premiums skyrocketed in recent years and many plans aren’t taking easily implementable steps to reduce the burden, according to actuaries.
For plans that aren’t fully funded, the rise in premiums owed to the Pension Benefit Guaranty Corporation is particularly steep. Between 2009 and 2016, the average single-employer corporate plan’s variable rate premium paid to the PBGC jumped about sixfold, from $156,000 to $934,000, according to a study recently released by pension consulting firm October Three.
One way that some underfunded plans can make those costs more manageable is to make contributions after the plan year ends but within an 8 1/2-month grace period extending from the close of the plan year, October Three said in the study.
By making current-year contributions for a prior plan year, plans can increase the value of the assets they report for the prior year. And by disclosing greater assets, a plan can report a higher funding level. Higher funding often means that a plan will owe less to the PBGC in variable rate premiums.
“Underfunded plans that fail to make proper use of grace period contributions are leaving money on the table,” John Lowell, a partner at October Three in Atlanta, and a contributor to the report, told Bloomberg BNA April 5.
Underfunded plans can also reduce PBGC premiums by making contributions in excess of minimum funding contribution requirements to improve the plan’s funding level. Every dollar contributed reduces premiums by the amount of the variable rate, which is 3.4 percent for plan years beginning in 2017.
Plans thinking about making excess contributions should consider whether the savings in PBGC premiums outweigh the cost of making the contributions, Zorast Wadia, a principal and consulting actuary in the benefits consulting firm Milliman’s New York office, told Bloomberg BNA April 5.
Both the borrowing expense and the opportunity cost of not using the money for other purposes needs to be analyzed, he said.
Other options for reducing PBGC premiums include using push back strategies to modestly accelerate plan contributions, selecting an appropriate interest rate for calculating PBGC vested liability and using risk transfer strategies, according to plan actuaries interviewed by Bloomberg BNA.
In its report, October Three analyzed the PBGC premium rates paid between 2009 and 2016 of about 5,000 plans with 250 or more participants. It found that about 65 percent of the plans failed to take steps that would have lowered those payments.
October Three identified one plan that paid $2.9 million in variable rate premiums in 2015. That plan could have saved $685,000, or about 24 percent of its premium cost, had it properly used grace period contributions, the report said.
Underfunded plans have other options to reduce their PBGC premiums.
Some plans can use “push back strategies,” which involve modestly accelerating contributions a plan has already budgeted. If a plan accelerates a contribution earmarked for Oct. 15 to Sept. 15, it can have the contribution count in the preceding plan year and reap the benefit of lower premiums for the earlier year, Lowell said.
A plan’s selection of which interest rates to use when computing PBGC vested liability can also improve its funding level and reduce its premium obligations, Greg Reardon, a consulting actuary with Cheiron in New York told Bloomberg BNA April 6.
If interest rates were to trend upward for a sustained time, a plan would benefit by selecting standard spot-interest rates rather than the 24-month average corporate bond rates that most plans are currently using, Reardon said.
Use of the standard rates will immediately reflect higher interest rates while the 24-month rates won’t reflect those higher interest rates as quickly. Higher interest rates reduce a plan’s liability, which improves its funding status and reduces PBGC variable rate premiums for many plans.
Plan sponsors should be fairly confident, however, about the midterm trend in interest rates before switching the rates. That’s because it will be locked into the selection for five years.
Plans can also reduce PBGC premiums by engaging in more traditional and complicated risk transfer strategies, such as offering participants lump-sum payouts and off-loading plan obligations to insurers through the purchase of insurance company annuities, Wadia said.
To contact the reporter on this story: David B. Brandolph in Washington at firstname.lastname@example.org
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October Three's report on PBGC premiums can be downloaded at http://pbgc.octoberthree.com/pbgc-premium-burden.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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