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Administration's Proposed Budget Includes Premium Increase in Pension Insurance

Source: David Wessel - WSJ

Posted on 14 Feb 2011

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President Barack Obama today released the fiscal year 2012 budget, which contains a proposal to increase  the premiums the Pension Benefit Guaranty Corp. (PBGC) charges employers by $16 billion over ten years and includes charging 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 represents big employers, recently has 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