KNOWLEDGE CENTER

Knowledge Center Archive

Apr
9
2011

What Does the New Proposal on PBGC Premiums Mean to Pension Plan Sponsors?

In February 2011, the President’s Fiscal Year 2012 budget proposal contained a potential change around how the Pension Benefit Guaranty Corporation (PBGC) premiums are set moving forward. The PBGC is a federal corporation that guarantees payment of basic pension benefits but does not receive taxpayer funds. The premiums, set by Congress, are used to fund the PBGC and ensure that the organization can meet its pension obligations in the future. Historically, premiums have been raised by Congress through legislation. As the obligations of the PBGC have grown through the years, Congress has consistently voted to raise flat-rate premium for single-employer plans year over year. The premium paid by plan sponsors has increased to $35 currently, directly increasing pension costs.

The budget proposal contained three significant impacts on the premiums being paid by defined benefit plan sponsors:

  1. The PBGC – not Congress - can set premiums based on financial health of the individual company and considerations of the individual plan.
  2. Any changes would be required to be phased in over a period of years.
  3. The PBGC would be directed to set premiums to avoid increases when the economy is weak.

Under the current premium structure, financially sound companies are forced to subsidize those that are not. The assumption is that the PBGC would provide lower or discounted premiums for financially strong companies sponsoring pensions with high funding levels. Companies with poorly funded plans would presumably be required to pay higher premiums.

The proposal has been based on the system used by the Federal Deposit Insurance Corporation (FDIC). The FDIC sets its own premiums based on the specifics of individual banks. Similar to the FDIC, the expectation is that the PBGC will be required to undertake comprehensive study and consultation before implementing its premium structure.

This is for educational purposes only. Not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information. Information provided by SEI Investments Management Corp., a wholly owned subsidiary of SEI Investments Company. ©SEI 2011