PBGC Premium Increases Continue – How Sponsors Can Fight Back
The Pension Benefit Guaranty Corporation (PBGC) has announced the2020 Plan Year premium rates. This announcement reminds plan sponsors that providing the same pension benefits continues to be more and more expensive, especially if they maintain underfunded liabilities. Luckily, sponsors can implement a number of Simply Smarter SolutionsTM to mitigate this increased cost burden.
New Premium Rates
All PBGC premium rates are indexed based on changes in the national average wage index, which increased 3.6%. The 2020 premium rates for single employer plans can be found in the table below, along with the 2019 rates for comparison.
An unwelcome milestone
PBGC premiums have now reached a new milestone: after spending 23 years at 0.9% of underfunding, the premium is now fully five times the 2013 rate. This unwelcome development for sponsors of plans underfunded on a PBGC basis reinforces the importance of optimizing the selection of the PBGC interest rate methodology. For more on how recent interest rate moves impact PBGC interest rate elections, see our recent blog post on the topic.
Reducing headcount through risk transfer
There are a number of ways plan sponsors can reduce plan headcount, thereby reducing the size and risk of their plan while also reducing annual PBGC premiums. Many sponsors have already implemented relatively simple risk-transfer projects such as lump sum windows for former employees with deferred vested benefits and retiree annuity purchases. These projects continue to provide quite a bit of value, with almost $65,000 savings *per year* for every 100-participant reduction in headcount for sufficiently underfunded plans.
Sponsors who have not yet implemented these garden-variety risk transfer projects should seriously consider doing so, especially if their plan year is off-calendar, as they may still have time to implement before 2020 PBGC premiums are determined. Even sponsors who have already gone through these projects should consider whether another bite at the apple would make sense. And in light of this recently-announced premium increase, sponsors should also consider less common headcount reduction strategies, such as lump sum windows for retirees, or a more complex transaction that would allow employees to access their benefits while working.
Closing the gap – cheaper than you think!
They say that cash is king, and many plan sponsors consider discretionary pension contributions a luxury. However, the truly unaffordable line item is maintaining PBGC underfunding. For sponsors with a PBGC deficit who are not subject to the per-participant cap, the debt-equivalent cost of this underfunding is approximately 8% (a liability discount rate of 3.5%, plus the additional 4.5% VRP). Many for-profit sponsors can borrow at a rate significantly below this 8% equivalent; meanwhile, many not-for-profit sponsors have asset pools outside their pension plan that would consider 8% an extremely good rate of return. Whether through a new debt issuance or an injection of unrestricted assets, many sponsors will find that keeping their plans fully funded on the PBGC basis is the most fiscally responsible path.
Holistic pension management
The PBGC milestone we have reached emphasizes the importance of an integrated approach to pension management. As more and more sponsors make contributions each year to avoid the increasingly painful VRP, it is ever clearer that plan sponsors and their advisors need to understand how investment strategy, contribution strategy and interest rate methods all impact annual funded status measurements.
To learn more about how you can mitigate the impact of PBGC premium increases on your plan, reach out to our pension risk management experts today.