February 16, 2011

Obama's 2012 Budget: What It Means for Pension Plans and the PBGC

Power would be given to adjust premiums based on risk

The Pension Benefit Guaranty Corp. can't adjust the premiums it charges companies based on the likelihood of retirement plan default. The president’s 2012 budget aims to change that by allowing the PBGC to charge companies more for those at greater risk.

President Obama's proposal will help strengthen the pension safety net, said PBGC Director Josh Gotbaum, by forcing accountability and the need for companies to pay closer attention to the management of its retirement plans.

Historically, Congress has raised PBGC premiums by legislation, but has generally not taken the individual circumstances of different company sponsors into account. As a result, financially sound companies are forced to subsidize those that are not.

The new pension insurance proposal was modeled on the deposit insurance system operated by the Federal Deposit Insurance Corp. (FDIC). The FDIC has, for two decades, set its own premiums based on the circumstances and risks of individual banks. It implemented its most recent premium structure only after several years of careful study, and consultation with the business community, labor, and other stakeholders. The PBGC would be required to undertake a similar process prior to implementing any changes.

Any changes would be required to be phased in over a period of years. In addition, the PBGC would be directed to set premiums to avoid increases when the economy is weak.

The PBGC has never received taxpayer funds. To help the agency meet its obligations, Congress has repeatedly raised premiums. As the agency notes, at least two bipartisan budget review groups, the Simpson-Bowles Commission, and the Domenici-Rivlin Commission, have recommended that the PBGC's premiums be raised again. The president's proposal was designed to allow premium increases that are fairer to the business community and encourage preservation of pension plans.

"The question is not if or when premiums will be increased, but how it is done," Gotbaum said in a statement. "What the President proposes is a better and fairer approach than raising premiums across the board and forcing responsible companies to subsidize those that are not."

“The President’s Budget proposes to strengthen the defined benefit system by shoring up the solvency of the Federal agency that acts as a backstop to protect pension payments for workers whose companies have failed,” Labor Secretary Hilda Solis said Wednesday in testimony before Congress. “More than 1.5 million workers and retirees already look to the Pension Benefit Guaranty Corporation for their benefits and PBGC insures plans covering 40 million others. The Budget would give the PBGC Board the authority to adjust premiums and directs PBGC to take into account the risks that different sponsors pose to their retirees and to PBGC. This will both encourage companies to fully fund their pension benefits and ensure the continued financial soundness of PBGC.”

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