March 22, 2011


Urge House members to examine the calculations of the PBGC deficit before increasing PBGC premiums
The U.S. House of Representatives Budget Committee is expected to offer its Fiscal 2012 budget proposal in the very near future. It is likely to include a proposal to increase Pension Benefit Guaranty Corporation (PBGC) premiums for defined benefit pension plan sponsors. The proposal will probably take the form of an instruction to the House Education and the Workforce Committee directing the committee to raise a specified amount of revenue from PBGC premiums. The Council has repeatedly challenged the calculation of the PBGC deficit, currently estimated by the agency to be $23 billion. The Council previously commissioned a study of the calculation methodology, Funding our Future: A Safe and Sound Approach to Defined Benefit Pension Plan Funding Reform, which exposed serious flaws in the PBGC's methodology.

The Obama Administration's Fiscal Year 2012 budget included a proposal that would give the PBGC Board the authority to adjust the premiums charged to defined benefit pension plan sponsors (see the February 14 Benefits Byte). House and Senate staff have been briefed on the recommendation by the PBGC. The proposal, estimated to raise $16 billion over ten years, specifically directs PBGC to take into account the risks that different sponsors' financial condition pose to their retirees and to the PBGC. The budget proposal would also require two years of study and public comment before any implementation and gradual phasing in of any increases. Last December, the President's National Commission on Fiscal Responsibility and Reform issued its final report recommending an increase in PBGC premiums by the same amount. The Council has met with PBGC staff and there is very little information known on how the $16 billion was calculated or how the PBGC would structure its study or the implementation of the premium increase other than that the agency would consider a company's credit rating, rather than just its funding status, in determining the premiums owed.

The Council's main concerns are:

  1. Under the proposal, Congress would give away its jurisdiction over a large amount of revenue and would eliminate the ability of the pension community to engage in a public policy dialogue with Congress on this key issue.
  2. A $16 billion increase in premiums over the budget window is an enormous increase. The total revenue from premiums today is approximately $2.23 billion annually ($2.32 billion if multiemployer plan premiums are included). The proposal would, on average, almost double that amount in the eight years that it is effective within the budget window.
  3. The proposal would impose a huge burden on "high-risk companies" but would not eliminate the threat of higher premiums for companies that are not high-risk. Based on preliminary calculations some companies could be required to pay over $1,000 per participant when the proposal is fully phased in. To put this in context, the current flat-rate premium is $35 per participant.
  4. The proposal would require the government to rely on the credit rating agencies to determine the creditworthiness of private companies and tax-exempt organizations.
  5. There is a disconnect between raising premiums and the PBGC's real financial needs. PBGC's own annual report for 2010 supports the argument that the deficit, even as calculated by the PBGC, does not pose the threat of a taxpayer bailout. The PBGC's annual report states that "[s]ince our obligations are paid out over decades, we have more than sufficient funds to pay benefits for the foreseeable future."
  6. There are serious questions about the validity of the PBGC's calculation of its deficit. The assumptions that PBGC uses to determine that deficit are based on a hypothetical purchase of annuities, despite the fact that the PBGC does not purchase annuities. It may well be that the PBGC uses these assumptions in order to be consistent with a separate litigation position. Under that position, participants can receive far less benefits than they would receive if Pension Protection Act (PPA) assumptions applicable to employer sponsored plans were used. This further calls into question the PBGC's assumptions.

Your help is needed. Please contact members of the House and Senate, in particular the House leadership, House Budget Committee, House Education and Workforce Committee, and House Ways and Means Committee (see below) to express your concern over an increase in PBGC premiums without an examination of the calculation of the PBGC deficit. It is important that congressional members hear directly from companies expressing concern about changes to the premiums until there is greater confidence in the way the agency's deficit is determined. Moreover, concerns about the methods by which credit agencies determine their ratings, and granting authority to the PBGC to determine its premiums, add further uncertainty to this proposal.

Contact Links:

House of Representatives Leadership

House Budget Committee

House Education and the Workforce Committee

House Ways and Means Committee