(Bloomberg) — The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.
The deal could affect any pre-retiree in a former employer’s pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive in the stroke of a pen.
Employers are already deeply concerned about the extent and uncertainty of future pension liabilities, and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.
The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate single-employer premiums paid to the PBGC, which acts as a backstop to a company’s pension liability should the company become insolvent. Those premiums will already have risen from $31 to $64 from 2007 to 2016; by 2019 they will reach $78.
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An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pension all at once, as a lump sum based on the present value of their future benefit. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefits risk practice.