PBGC Raises Pension Premium Rates for 2020

Reducing plan headcount could lessen bite of higher premiums

By Stephen Miller, CEBS
October 23, 2019 - SHRM

The federal Pension Benefit Guaranty Corp. (PBGC), which insures defined benefit pension plans against being unable to meet their obligations to vested participants, announced on Oct. 11 that pension sponsors will pay higher premium rates in 2020 for single-employer and multiemployer defined benefit plans.

For single-employer plans, the per-participant flat-rate premium will be $83, up from $80 in 2019. The variable-rate premium per $1,000 in unfunded vested benefits will be $45, up from $43, with a per participant cap of $561, up from $541.

For multiemployer plans, the per-participant flat-rate premium is $30, up from $29 in 2019. 

Single-employer plan rates

Multiemployer plan rates

Source: Pension Benefit Guarnty Corp.

PBGC premium rates are indexed based on changes in the national average wage index, and the 2020 increases reflect a 3.6 percent rise in the national average wage during 2018.

Lowering Headcount to Reduce Premiums

Minimizing PBGC variable-rate premiums often depends on maximizing the use of "grace period" contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year, said John Lowell, an Atlanta-based partner and actuary with October Three, a pension advisory firm. However, "absent the ability to make really significant funding contributions, the only premium reduction strategy for most will be reducing headcount," Lowell said. "That can be done via lump sum windows or annuity purchases."

The announcement of higher rates "reinforces the importance of optimizing the selection of the PBGC interest rate methodology," whether the flat or the variable rate, according to Joe Anzalone, director and consulting actuary in the New York City office of retirement plan and actuarial consulting firm River and Mercantile Group. Like Lowell, he noted that "many sponsors have already implemented relatively simple risk-transfer projects, such as lump sum windows for former employees with deferred vested benefits and retiree annuity purchases."

A participant who elects a lump sum would receive a single payment at retirement instead of monthly pension checks. "Offering lump sums to nonretired, terminated participants has become a popular strategy among pension plan sponsors the last couple years as a way to reduce headcount without paying a premium to an insurance company to off-load the obligations," noted HR consultancy Findley.

Added Anzalone, in light of the premium increase, "sponsors should also consider less common headcount reduction strategies, such as lump sum windows for retirees [who are already receiving pension payments], or a more complex transaction that would allow employees to access their benefits while working."

Disappearing Pensions

Once common among large and midsize U.S. companies, traditional defined benefit pension plans are offered by only 21 percent of Society for Human Resource Management (SHRM) members. Ten percent maintain a pension plan frozen for current employees or not open to new hires..

General Electric Co. announced Oct. 7 that it is freezing new vesting in its defined benefit pension plan for about 20,000 current U.S. employees with salaried benefits, effective Jan. 1, 2020, as part of its effort to reduce its pension deficit by up to $8 billion.

In deciding whether to keep plans open to all employees, PBGC premiums "are certainly a factor," Lowell said. However, pension plan sponsors shouldn't be short-sighted, he advised.

"Most companies with open defined benefit plans view them as a competitive advantage and a strategic decision, and they view PBGC premiums as part of the cost of doing that."