Insights

PBGC Premiums and The Health of The US Pension System

The Pension Benefit Guaranty Corporation (PBGC) surplus for single-employer plans has important implications for plan sponsors. In this piece, we provide perspective on how the surplus came about and what it means for the pension system.

Retirement Public Policy Strategist
Senior Investment Strategist

Single-Employer vs. Multiemployer PBGC Programs

In March, the American Rescue Plan Act addressed the biggest problem facing the PBGC, the agency that insures private pension plans: its projected insolvency due to the underfunding of many multiemployer pension plans. The legislation targeted a problem that needed to be fixed for millions of American workers — who could have otherwise faced drastic cuts to their pensions — and for PBGC.

But another PBGC issue deserves careful review. The PBGC’s multiemployer program has a huge deficit and was facing insolvency, but PBGC also maintains an insurance program for single-employer plans. The single-employer program is legally separate from the multiemployer program, however, and the assets of one program cannot be used to pay the obligations of the other. 

The PBGC’s single-employer program ran deficits for many years, and as recently as 2015, the deficit was $24.1 billion and remained over $10 billion through 2017. This led to a series of increases in the premiums charged to single-employer plans. In 2005, the flat-rate per participant premium was $19, and the variable-rate premium was generally 0.9 percent of the plan’s underfunding. Starting in 2006, premium increases resulted in the flat-rate premium increasing to $86 this year. The variable-rate premium has increased even more — by over 410 percent to 4.6 percent. As a result, the total per-participant premium for many employers, even many that are otherwise fully funded, is $668 per participant (the legal cap on per-participant premiums this year) (Figure 1). To put this into context, for a 29-year old participant in a traditional defined benefit plan with a normal benefit formula, the $668 per participant exceeds the value of the pension benefit earned during a year.

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The PBGC Surplus and Its Implications

When the PBGC was running a deficit for many years prior to 2018, Congress understandably addressed those concerns by raising premiums. As a result, since 2017, PBGC’s single-employer program has been building a large surplus for its single-employer program and that surplus is expected to continue to grow very rapidly. According to the PBGC’s own estimates, in 2020, its single-employer program had a $15.5 billion surplus, and the agency projects that that surplus will grow to $46.3 billion by 2029 (Figure 2). And the Congressional Budget Office has estimated that the American Rescue Plan Act will add another $7 billion to the PBGC’s surplus over 10 years, resulting in a total surplus of more than $50 billion.

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Furthermore, some in the pension plan community believe that the PBGC’s surplus numbers understate the real amount of the surplus. This is because the PBGC values its liabilities based on what it would cost to purchase commercial annuities to cover those liabilities. This results in the PBGC valuing its liabilities based on low interest rates. In fact, the agency does not purchase annuities to cover its liabilities, raising a question in some people’s minds regarding whether the annuity purchase model is the right way to value PBGC’s liabilities. 

We want to highlight the effects of the current premium regime on pension plan sponsors. A well-funded plan with 50,000 participants can be paying $33.4 million in premiums (i.e., $668 per participant). Think of it another way. Many pension plans have far more retired participants than active participants. So, assume that 40,000 of those 50,000 participants are retirees. In that case, the $33.4 million premium payment works out to $3,340 per active participant. 

In part because of the current level of premiums, many employers are getting out of the pension system in whole or in part. This in turn raises questions about the strength of the PBGC’s premium base and whether we will get to a point where the PBGC is left primarily with less healthy companies supporting it, as financially strong companies exit the system. We believe that this concern should be considered in evaluating the long-term health of pension systems.

The current premium levels can also be expected to cause some less well-funded plans to take on additional risk in their investments in an attempt to cover the higher cost of the plan and to reduce future variable-rate premiums. Reductions in the current premium levels could correspondingly result in less risk being taken on. 

Premium levels involve hard public policy issues, but in order to assess the advisability of future actions, it is important to understand where we are today and how we got here.

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