The new federal budget is putting pressure on the private U.S. retirement system as it calls for hikes in Pension Benefit Guaranty Corporation premiums for single-employer pension plans.
“Flat-rate premiums will increase to $69 in 2017; $74 in 2018; and $80 in 2019 — more than twice the 2012 rate,” writes Mike Nesper for Employee Benefit Adviser. PBGC “acts as a backstop to a company’s pension liability should the company become insolvent,” writes Suzanne Woolley for Bloomberg Business. “Those premiums will already have risen from $31 in 2007.”
The result: pension plans are working to manage costs, at the expense of defined-benefit plans and workers who expect to benefit from them.
A likely cost-saving measure – encouraging participants “a chance to take their pensions all at once, as lump sums based on the present value of their future benefit,” Woolley writes. “More lump-sum deals aren’t good news for employees, about 40 percent to 60 percent of whom take the deals,” she writes. “Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren’t at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.”
More defined-benefits plans than ever could cease, as well, Paula Aven Gladych writes for Employee Benefit Adviser. “The unintended consequence of the increases is that the U.S. will see a lot more companies freezing or shutting down their defined benefit pension plans in the near future,” Gladych writes.
The premium increases will affect more than employers offering defined benefit plans, Nesper writes. “As more and more plans exit the system, there will be less demand for DB consultants and asset managers,” he writes.
And, it could cause other repercussions, Woolley writes. “The premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking headcount in pension plans,” he writes. As employers work to understand the implications of the premium increase, they should work with their advisers to create a strategy to move forward, Nesper writes.
And though rates through 2019 are set, organizations like the ERISA Industry Committee will continue educating legislators about their implications, Nesper writes. “Large employers help innovate retirement options for employees, (and) ERIC wants to work with Congress to improve retirement savings, instead of encouraging an exit from the pension system,” he writes.