A Bush administration proposal for shoring up the U.S. defined benefit pension system could end up punishing well-run plans.[@@]

Researchers at Watson Wyatt Worldwide, Washington, a personnel consulting firm, draw that conclusion in a report based on an analysis of defined benefit pension plans at 473 large U.S. companies.

Pension experts worry that many employers are promising overly rich pension benefits, contributing too little to plans and paying too little to the Pension Benefit Guaranty Corp., the federal pension insurance program, to ensure that the PBGC will be able to protect participants in all failed plans.

Bush administration officials have proposed a new PBGC premium structure that would increase the “flat-rate” premiums that all plan sponsors pay and change the formula used to set “variable” rates for underfunded plans and plans that have invested heavily in what are believed to be high-risk assets, such as bonds from companies with low credit ratings.

The Watson Wyatt analysis suggests the proposal would increase premiums for the 106 companies with troubled plans 113% and would increase premiums for the other employers about 240%, according to Watson Wyatt.

Increasing the burden on the healthy plans might lead to a death spiral in the defined benefit pension market, by encouraging employers to shut down the healthy plans and leave the PBGC with a sicker, more expensive to insure group of customers, Watson Wyatt researchers argue.