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Thursday, February 28, 2013

Proposals to Change Pension Benefit Guaranty Corporation’s (PBGC) Premium Structure: Issues for Congress

John J. Topoleski
Analyst in Income Security

This report provides background and analysis of the premiums charged by the Pension Benefit Guaranty Corporation (PBGC), which is a government-owned corporation that was created in 1974 to protect the retirement income of participants in private-sector, defined benefit (DB) pension plans. When a company terminates a DB pension plan that does not have enough assets to pay 100% of the promised benefits, PBGC pays, in accordance with statute and up to a maximum yearly dollar amount, the benefits to participants in the terminated plan. In FY2012, 887,000 individuals received $5.5 billion in benefit payments from PBGC. An additional 614,000 workers will receive benefits when they retire.

PBGC consists of two insurance programs: (1) a multiemployer pension program, which protects the benefits of 10.3 million participants in collectively bargained DB pensions in which several employers make contributions, and (2) a larger single-employer pension program, which protects the benefits of 33.4 million participants in DB pensions operated by one employer for its eligible employees. Since FY2002, PBGC has ended each fiscal year with a deficit. The total deficit for the PBGC at the end of FY2012 was $34.4 billion. Most of this deficit is attributable to the single-employer program, which ended FY2012 with a deficit of $29.1 billion. At the end of FY2012, PBGC’s single-employer program reported assets of $83.0 billion and liabilities of $112.1 billion. Most of PBGC’s liabilities are future benefit obligations.

Although PBGC receives no congressional appropriations, its financial condition may be of interest to Congress. If PBGC’s deficit persists, then cuts to benefits or U.S. government financial assistance could be necessary. PBGC is funded by a combination of insurance premiums paid by employers who sponsor DB pension plans, the assets of DB pension plans that are trusteed by PBGC, and income earned on the investment of the trusteed plan assets.

Some policymakers who are concerned by PBGC’s financial position have renewed the calls for changes to the structure of the premiums that PBGC collects from employers. The suggested changes include increasing current premium levels or adding a premium that would better reflect a pension plan’s potential liability to PBGC. Currently, PBGC collects three premiums from DB plan sponsors: (1) an annual flat-rate premium of $42 per participant; (2) an annual variable-rate premium of $9 per $1,000 of underfunding; or (3) a termination premium of $1,250 per plan participant per year for three years for pension plans that terminate under certain conditions. Changes to PBGC’s premium structure were included in the Department of Labor’s FY2012 and FY2013 proposed budgets. In the 112
th Congress, H.Con.Res. 34, the Concurrent Resolution of the Budget for Fiscal Year 2012, and H.Con.Res. 112, the Concurrent Resolution of the Budget for Fiscal Year 2013, recognized a need to reform PBGC but did not adopt the President’s budget recommendations. In the 112th Congress, the Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141) increased the premiums levels but did not change the structure of the premiums that DB plan sponsors pay. Proponents of changes to PBGC’s premium structure argue that the current premium structure does not adequately reflect the risk to PBGC of some underfunded pension plans. Some have proposed that PBGC charge premiums based on the financial health of a DB plan sponsor. They argue that the pension plans of financially healthy plan sponsors are less likely to be terminated and trusteed by PBGC and should not have to pay the same amount in premiums as less financially healthy companies. Although risk-based premiums would better allocate the risk of termination among DB plan sponsors, their implementation would raise additional concerns.

Date of Report: February 14, 2013
Number of Pages: 18
Order Number: R42521
Price: $29.95

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