Yet another nail in the pension coffin

Yet another nail in the pension coffin October 31, 2015

Here’s some news out of the latest budget deal that pretty much escaped the notice of the general public:  PBGC premiums have again been increased.

What, you say, are PBGC premiums?  Some quick background for non-actuaries:  the Pension Benefit Guaranty Corporation, is a FDIC-like agency whose purpose is to protect the pensions of employees of bankrupt companies.  Established as a part of the 1974 ERISA legislation, it collects premiums from employers who provide defined benefit pensions, both a flat per-participant amount and an additional premium based on the relative underfunding of the plan.  Then, whenever a bankrupt company’s plan is taken over by the PBGC, it uses whatever funds remain in that company’s pension fund, as well as additional funds generated from these premiums, to pay those pensions.  Because of a number of takeovers of very-underfunded pension plans from bankrupt companies, and because the PBGC’s financial health isn’t measured on the basis of yearly inflows and outflows, but is measured based on the present-value cost of future pension promises (using conservative assumptions, boosting liabilities, so quite the opposite of state and local public plans using aggressive liability-lowering assumptions), the PBGC does have an underfunding issue, so, if you take no note of the unintended consequences, it makes perfect sense to boost premiums.

And bankrate.com reports:

The insurance premiums that companies pay into the Pension Benefit Guarantee Corp., or PBGC, will increase. The single-employer fixed premium would be raised from $64 per person to $68 for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation. The proposal also tightens the way that companies calculate their actuarial liabilities to better reflect lengthening life spans. This is a win for anyone in the private sector expecting an old-fashioned defined benefit pension.

Now, “indexed for inflation” isn’t quite right — the new indexation will be by average wage increases, so the premiums will grow faster than inflation.  But nonetheless, it sounds pretty sunny.

But what’s the ultimate consequence?  Only the hastening of the end of employer-sponsored defined benefit pensions.

Here’s the deal:  remember how I asked the other day, “Why don’t retirees buy annuities?” — and discussed costs and skepticism?  Well, employers don’t think that annuities are such a bad deal.  It’s called pension de-risking, and right now it’s about the only growth industry in the pension consulting business (which is, ironically, all about getting the consulting firms a big dose of short-term profit at the expense of their long-term business, since, as DB pensions disappear, so will DB pension-consulting jobs).  Employers start by offering “terminated vesteds” (those who left the company and have the right to a benefit in the future) an actuarially-equivalent  lump sum in exchange for forgoing their pension at retirement.   Then they offer retirees the same deal.  Then, for those who turn down the deal, they buy annuities from one of the major providers such as Prudential.  For example, General Motors did this, and now my Dad gets his pension check from Prudential each month.  Verizon made the news for such a deal, because they also had enormous numbers of retirees.  And, at work, I listen to training sessions in which colleagues present the materials they also show to clients, which demonstrate that, when taking into account group annuity rates, and the additional costs an employer bears besides just the pension checks themselves, buying annuities for their retirees are a pretty good deal.  And what are those additional costs?  Administrative expenses, yes, and also exactly these PBGC premiums — so that every additional increase (and this is the third since 2012) moves the calculus further in favor of the de-risking option.

And what’s the reason for the premium hikes?  Because, in budget scorekeeping, even though the money is earmarked for the PBGC alone, it still counts as revenue, and is perceived of by Congress as “free money” – that is, additional revenue without a major special interest group complaining, as you’d get if you raised taxes.  (See this Forbes article, among others.)

Now, there’s nothing all that harmful with employers buying annuities for pensioners.  Sure, an interest group called ProtectSeniors.org calls this “pension stripping” and complains that retirees with annuities rather than pension benefits lose ERISA protections such as creditor protection.  But the risks to individual retirees are minimal, when the receive annuities — it’s only when they choose a lump sum option, but without the ability to manage it, and without the investment risk and longevity risk protections of pensions, that they’re at risk, and employers pair lump sum offerings and annuities together whenever they have a de-risking program.

Besides which, there are still employers who offer defined benefit pension plans with ongoing accruals.  Their numbers are shrinking, and there’s every reason to believe that their numbers will continue to shrink down to zero, but in the meantime, they provide a meaningful benefit for their employees, with protections defined contribution/401k plans lack, no matter how generous they may be.  And, besides simply being unfair, using employers as a cash cow in this manner will only accelerate this trend.

As a reminder:  yes, pensions are disappearing; there’s no stopping that.  Yes, we need some way forward that helps Americans manage risk in ways that DC plans lack.  But it’s foolish to accelerate the end of DB plans when we haven’t figured this out.

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