Single Employer Pension Fees to Increase Following 2015 Budget Act
The Bipartisan Budget Act of 2015 was signed into law on November 1, 2015. The primary intent of the law was to increase federal spending limits and raise the debt ceiling, but the BBA also included two other important pension provisions.
The Bipartisan Budget Act of 2015 (“BBA”) was signed into law on November 1, 2015. While the primary intent of the law was to increase federal spending limits and raise the debt ceiling, the BBA also included two important pension provisions:
1) MAP-21 rates were extended, which allows defined-benefit pension plans maintained by single employers to calculate pension liabilities in a way that lowers minimum funding requirements; and
2) Pension premiums paid to the Pension Benefit Guaranty Corporation (“PBGC”) by single employer plan sponsors will increase for plan years 2017 through 2019.
Both the fixed premiums and the variable rate premiums paid to the PBGC by single employer pension plans are scheduled to increase as follows:
• For 2017, fixed premiums will increase to $69 per participant, up from $64 in 2016 and $57 in 2015. Variable rate premiums will increase by $3.00.
• For 2018, fixed premiums will increase to $74, while variable rate premiums will increase by $4.00.
• For 2019, fixed premiums will increase to $80, with another $4.00 increase for variable rate premiums.
The single-employer variable-rate premium is $30 per $1,000 of unfunded vested benefits for 2016.
The PBGC increases caused considerable comment among industry watchers, since the PBGC had not requested the rate changes. However, the PBGC rate increases qualify as a revenue source in the federal budget. The $4 billion in additional pension fees from 2016 through 2025 resulting from the action helped to offset the budgeted cost of federal spending increases.
Funding rates for multi-employer pension funds remain unchanged under the BBA, even though multi-employer plans face more serious funding shortages. The PBGC estimates that the FY 2014 deficit of $42.4 billion for multi-employer plans will decline to approximately $28 billion (measured in present value) for FY 2024.
A number of defined benefit pension plan sponsors—including Verizon, General Motors, and Ford Motor Company—have transferred payment obligations to third parties in a move known as “pension terminal funding.”
When this happens, a plan sponsor transfers a defined amount of outstanding pension obligations to an insurance company in exchange for an advance premium and administrative costs. The insurer then assumes liability for the payments, and the transferred pension obligations are removed from the balance sheet of the original plan sponsor. The participants whose benefits are transferred are no longer subject to the fixed premium calculation and the assets transferred no longer impact the variable premium.
The PBGC’s rate increase for single-employer plans may accelerate the trend for plan sponsors to terminate defined benefit pension plans.
In another recent announcement, the agency alerted participants in PBGC-covered pension plans that the 2016 annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan will remain unchanged at $60,136. Guaranteed benefit levels for multiemployer plan participants will also remain the same as they were in 2015. A zero increase in Social Security’s annual cost-of-living adjustment is behind the benefit calculations.
The PBGC reported pension payments of $5.7 billion to more than 800,000 people in failed pension plans during FY 2015, which is similar to benefit levels paid in FY 2014.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.