Many pensions plan sponsors have taken strides to reduce
their premium payments made to the Pension Benefit Guaranty Corporation but
hundreds have yet to adopt best practices, according to a new report.
The “2021 PBGC Premium Burden Report” from consulting firm
October Three analyzes the experience of an estimated 4,500 U.S. pension plans
to alert plan sponsors to “skyrocketing PBGC premiums,” and to provide defined
benefit plan sponsors with information about strategies to lower PBGC payments.
“We found that companies were leaving hundreds of millions
of dollars on the table paying more than they had to because nobody has said to
them, ’Hey, if you record this contribution here instead of there it reduces
your premiums, or if you make this contribution one month earlier, it reduces
your premiums,’” says Brian Donohue, a partner at October Three in Chicago, and
author of the report. “Part of our impetus to write this report is to get the
message out, understand what’s coming, understand the best practices that are
available and how they can really be useful to the sponsors to limit the impact
of the higher premiums that all plans are going to be struggling with.”
According to the 2021 report, between 2012 and 2019,
pensions’ failure to adopt best practices caused plan sponsors to pay $1.1
billion more in premiums.
Since 2008, single-employer plan sponsors have paid more
than $50 billion in PBGC premiums, including $50 million in the five previous
years alone, according to the report. October Three’s report has previously
shown that 40% of pension plan sponsors would benefit from adopting the
suggested strategies to lower their PBGC premiums.
The 2018 report showed that pension plan sponsors paid $1.2
billion less in insurance premiums to PBGC compared to 2017, due to record
levels of voluntary contributions made for 2017. “Most employers have taken
steps to manage this growing burden by settling liabilities [annuity purchases
and lump-sum offers] and making voluntary contributions,” the report states.
Premiums for single-employer plans are calculated by the sum
of a flat-rate premium—$86 per participant in 2021—plus a variable-rate
premium, which was 4.6% of unfunded liabilities in 2021. Per-participant
premiums were capped at $582 for 2021.
The per-participant cap for 2022 is $598, says Dan Atkinson,
consulting actuary at BCG Pension Risk Consultants | BCG Penbridge.
In 2021, plan sponsors missed out on saving $25 million—for
recording errors alone—in premium payments by not strategizing, the October
Three report shows. Recording errors are the lowest hanging fruit because these
are contributions that could have been included in the premium calculation but
weren’t, explains Donohue.
“Additional savings associated with a ‘modestly accelerated
funding schedule’, i.e., accelerating required contributions by one to five
months, would have saved an additional $11 million [ignoring the impact of voluntary
year-end contributions, which are more challenging],” he says.
In 2020, total premiums paid by pension plan sponsors were
$5.64 billion: $1.87 billion was for headcount premiums and $3.77 billion for
variable premiums paid only by underfunded plans, Donohue adds.
The report did not show premiums paid in 2021, as data is
now being analyzed, he says. For 2022, the per-participant premium is $88, and
the variable-rate premium is 4.8%.
Strategies to Pay Less
Plan sponsors can tweak PBGC premium calculations using
several techniques, for example, choosing
between an alternative and standard method to calculate premiums. The
standard method uses interest rates from the month prior to the start of the
plan year, and the alternative uses 24-month averaging. Plan sponsors must
stick with their selection for five years, Atkinson notes.
“One method might give you the better results three out of
the five years, four of the five years,” Atkinson explains. “Overall you’re
probably not going to get the best result all five years, though it’s certainly
possible. But it turns into a strategy because for an ongoing plan you probably
recognize that neither method is always going to be superior.”
He adds that the results can differ from year to year.
“The result is when rates are falling, the standard method
gives a worst result or higher liability than the alternative method because
the alternative hasn’t picked up how much the rates have fallen,” he explains.
“Over the last few years, we’ve seen that the alternative method has yielded
better results—lower liabilities and therefore lower PBGC premiums—and in the
last few years we have seen plans switching from the standard method to the
alternative method.”
Another strategy that plan sponsors can use to pay less is
fixing the recording errors by not making changes to the plan funding pattern.
Instead, pensions should assess the plan’s ability to record grace period
contributions for the prior year, Donohue advises.
“We view these recording errors as the most egregious
failure to adopt best practices for premium management and the easiest to
correct,” Donohue states in the report.
Addressing the accelerated funding schedule strategy more,
the October Three report says plan sponsors should accelerate contributions due
on October 15 to September 15; accelerate quarterly contributions due on
January 15 to September 15 and record those contributions for the prior
year
In addition, plan sponsors can accelerate residual minimum
required contributions due on September 15 to April 15, which allows plans to
record April 15 and July 15 contributions for the prior year; and accelerate
year-end contributions to September 15 and record those contributions for the
prior year.
An additional strategy for reducing PBGC premiums is
ensuring the participant data is clean, especially if the plan is at the
per-participant cap, Atkinson says. “We do very often see participant plan
participant data will include someone or a number of people who have passed
away in prior years, or they’ll include the beneficiaries of retired
participants where the beneficiary passed away in prior years,” he says.
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