At an industry conference in Washington, DC several years ago, I was sitting at the breakfast table griping about a new pension law that had been passed for what seemed like dubious reasons. I threw up my hands and said, “I guess I just don’t understand how Washington works!” The lady refilling my orange juice sidled up to me. “Honey,” she said in a low, consoling voice. “Even the people in Washington…don’t understand how Washington works.”
Fast forward to the present. There is a provision in the recent Bipartisan Budget Act of 2015 that is very, very bad for defined benefit plan sponsors. PBGC premiums are being increased – again. What is most noteworthy is not the mere fact that premiums are going up. Rather, it is why they are being raised.
Nearly every bill introduced in Congress is given a cost estimate by the Congressional Budget Office. You commonly hear of a 10-year score given by the CBO; for example, a certain bill will add $100 billion to the deficit over the next 10 years. To make the bills more politically appealing, Congress might add “revenue raisers” to offset the 10-year cost of whatever the bill’s main intent is. The law I was complaining about in Washington (MAP-21) allowed companies to contribute less money to their defined benefit plans. Why did they pass this law? Had Congress been sitting around thinking of ways it could help companies struggling to make pension payments? Of course not.
The provision about reduced contributions was included in MAP-21 to help pay for highways, of all things. How does that work? Well, pension contributions are tax-deductible. The less a company contributes, the bigger its tax bill. What do pensions have to do with highways? Nada. But the increased taxes resulting from lower pension contributions can offset the cost of said highways and improve that bill’s 10-year CBO score.
Sticking pension provisions into unrelated laws as revenue raisers has been a common occurrence over the last few decades. However, your friends in Congress really outdid themselves with the Bipartisan Budget Act of 2015. First of all, as we wrote earlier this year, they are making a regular habit of using PBGC premiums as a piggy bank. This is the third premium increase in the last four years. Second, the premium rates have been – what is the technical term? – jacked up to the moon. The flat-rate premium is slated to rise to $80 per participant by 2019. In 2005, it was $19 per participant, so there will be a four-fold increase in 14 years. The variable-rate premium, which was $9 as recently as 2013, will be at least $41 in 2019. This is at least a four-fold increase in seven years and could be as much as five-fold when cost of living is factored in.
Judy Miller of the American Society of Pension Professionals and Actuaries calls these increases "unconscionable" and points out that this is “fake revenue” since the premiums go directly to the PBGC and not the Treasury. And here’s the craziest part of all. Normally, the PBGC premiums are due on October 15. For the year 2025 only, they will be due on September 15. It just so happens that the federal government’s fiscal year ends on September 30. It also happens that 2025 is 10 years from now. Premiums arriving on September 15, 2025 could be counted in the bill’s 10-year CBO score. Premiums arriving on October 15, 2025 would be outside the 10-year window. See what they did there?
In a future article, we will look at some examples of how this change will affect both underfunded and fully funded plans. We will comment (again) on the negative impact these premium increases will have on the defined benefit pension system. For now, we will stop here. It is enough for one day to have seen a cool sleight-of-hand trick such as moving the PBGC premium date up by a month and to have been reminded of how pensions are regularly an afterthought tacked onto unrelated legislation. Now we all understand: this is how Washington works.