The Bipartisan Budget Act of 2015 (“BBA”) became law on November 1, 2015. While the primary intent of the law was to increase federal spending limits and raise the debt ceiling, the BBA also included two important pension provisions:
- MAP-21 rates were expanded, allowing defined benefit pension plans maintained by individual employers to calculate pension liabilities in a way that reduces minimum funding requirements; Y
- Pension premiums paid to Pension Benefit Guaranty Corporation (“PBGC”) by single employer plan sponsors will increase for plan years 2017 through 2019.
Both the fixed premiums and variable rate premiums paid to the PBGC for single employer pension plans are scheduled to increase as follows:
- For 2017, fixed premiums will increase to $ 69 per participant, compared to $ 64 in 2016 and $ 57 in 2015. Variable rate premiums will increase by $ 3.00.
- For 2018, fixed premiums will increase to $ 74, while variable rate premiums will increase by $ 4.00.
- For 2019, fixed premiums will increase to $ 80, with another increase of $ 4.00 for variable rate premiums.
The variable rate premium for a single employer is $ 30 for every $ 1,000 of unfunded vested benefits for 2016.
The PBGC increases caused considerable comment among industry observers, as PBGC had not requested the rate changes. However, PBGC rate increases qualify as a source of revenue in the federal budget. The $ 4 billion in additional pension fees from 2016 through 2025 resulting from the action helped offset the budgeted cost of federal spending increases.
Funding rates for multi-employer pension funds remain unchanged under the BBA, even though multi-employer plans face a more severe funding shortage. The PBGC estimates that the fiscal year 2014 deficit of $ 42.4 billion for multi-employer plans will decrease to approximately $ 28 billion (measured in present value) by fiscal year 2024.
As we have written in the past, various defined benefit pension plan sponsors, including Verizon, General Motors, and Ford Motor Company, have transferred payment obligations to third parties in an action known as “terminal pension financing.”
When this happens, a plan sponsor transfers a defined amount of outstanding pension obligations to an insurance company in exchange for an advance premium and administrative costs. The insurer then takes responsibility for the payments and the transferred pension obligations are removed from the original plan sponsor’s balance sheet. Participants whose benefits are transferred are no longer subject to the fixed premium calculation and the transferred assets no longer affect the variable premium.
The PBGC’s rate increase for single employer plans may accelerate the tendency for plan sponsors to cancel defined benefit pension plans.
In another recent announcement, the agency alerted participants in PBGC-covered pension plans that the 2016 maximum guaranteed annual benefit for a 65-year-old retiree in a single-employer plan will remain unchanged at $ 60,136. The guaranteed benefit levels for multi-employer plan participants will also remain the same as in 2015. A zero increase in the annual Social Security cost of living adjustment is behind the benefit calculations.
The PBGC reported pension payments of $ 5.7 billion to more than 800,000 people in failed pension plans during fiscal year 2015, which is similar to the levels of benefits paid in fiscal year 2014.