Employer groups oppose pension fees in budget deal

Lawmakers can count the $8 billion as new revenue without having to raise taxes, even though the higher premiums can hit businesses just as hard as a tax increase.

Overall, the budget agreement would ease some of the harshest cuts required under automatic spending curbs known as sequestration. The measure would restore $45 billion, half the amount scheduled to be automatically cut from the 2014 operating budgets of the Pentagon and some domestic agencies, lifting them above $1 trillion. The deal would also increase the contributions that federal workers pay into their retirement plans.

Olivia Mitchell, a pension expert at the University of Pennsylvania’s Wharton business school, said the trend of companies ending or freezing their pension plans has been playing out regardless of rising premiums. She said the latest increase may be painful for some businesses but argues that it’s needed because the system is not solvent in the long run.

“I think the reality is that we have undercharged premiums for defined benefit insurance since the beginning,” Mitchell said. “We have to start now to help the system bail out its shortfalls before it’s too late.”

The PBGC protects the pension benefits of nearly 44 million current and future beneficiaries. It now pays out benefits to 1.5 million people in plans that have failed.

The agency has about $85 billion in assets from the pension plans it has taken over, premiums and investment incomes to cover its annual operating losses. But it estimates its potential exposure to future pension losses from financially weak companies at about $292 billion. Some business groups say that estimate is too high.

In a report last year, the Government Accountability Office, Congress’ auditing and investigative arm, recommended that the PBGC restructure its premium rates to make it more risk-based and better reflect the risk of future claims. Financially healthier firms would pay less and financially riskier sponsors would pay more.

The Obama administration has proposed similar changes in the way pension premiums are charged. When PBGC Director Josh Gotbaum testified before Congress last year, he called it unfair that financially sound companies are being asked to make up the difference for those that are not.

“If Congress were to increase those premiums just to cover the actions of other companies, it would make the situation worse,” Gotbaum told the Education and the Workforce Committee panel that deals with pensions. “Think how hard it is to convince companies to keep their plans while you’re asking them to pay for the losses of others.”

See also: Plan sponsors need better direction from agencies