PRTs and their Impact on the PBGC

A recent article in PlanSponsor highlighted the fact that Pension Risk Transfers (PRT) have impacted the premium income collected by the Pension Benefit Guaranty Corporation (PBGC). During the 2015-2018 period, 8% of the companies insured by the PBGC transferred some or all of their plan liabilities. The cumulative impact of these actions may produce a fall in premium income received by the PBGC of just under $200 million for 2019’s plan year.

The PBGC is expected to generate roughly $2.23 billion in premium income for 2019, so the $196 million equates to an 8.7% hit. During the 2015-18 time frame, the PBGC saw 44% of large plan sponsors (>1,000) of DB plans engage in some form of a PRT. This activity caused more than 2.4 million American workers (from a pool of 30.9 million in 2014) to no longer be covered by the PBGC, either because they accepted a lump sum distribution or saw their benefit no covered by an annuity product.

Furthermore, in addition to a flat fee per participant ($80 in 2019), the PBGC collects a variable-rate premium (VRP) based on the plan’s underfunding. For the 2019 premium filing year, the VRP rate was $43 per $1,000 of unfunded vested benefits, with a cap of $541 per participant. The PBGC is estimated to have collect nearly $4.8 billion in VRP in 2019. There is no question in my mind that these additional fees are driving plan sponsors to seek alternatives to maintaining their DB pension plans further diminishing the use of these critical important benefits.

According to the PBGC, small plans are three times more likely to participate in a PRT than larger plans. In 2018, 168 plans paying a VRP, covering 117,050 workers, participated in a PRT thus reducing PBGC income by another 1.3%. This isn’t entirely all bad news for the PBGC, as the plans paying the VRP are less well funded and they reduce the participant population and the benefits that PBGC is responsible for insuring.

What may not be bad news for the PBGC, is in fact very bad news for the American worker, who is left with reduced benefits (PBGC cap in 2019 was $67,295 per participant in a single employer plan and $12,870 for a participant in a multi-employer provided plan) or no DB plan for a new worker and reliance on a defined contribution alternative, if they are fortunate to work for a company that offers one. According to a Brookings Institute study (2018) 44% of the American working population (53 million workers) are making on average $10.22/hour or $18,000/year. Do they really have the ability to fund a retirement benefit? This is a travesty!

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