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3 Big Pension Changes in the Budget Bill

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The Bipartisan Budget Act of 2015 has significant implications for pension plan sponsors, according to Jon Waite of SEI Institutional. The director of the advisory team and chief actuary for the firm told ThinkAdvisor on Wednesday that the bill touches on three areas that will affect sponsors differently.

The biggest change is in the premiums that sponsors pay to the Pension Benefit Guaranty Corp. Sponsors won’t be impacted until 2017, he said, but the increases are significant.

“Plan sponsors in general expected to see more increases come. I don’t think they expected it to come this soon, or this level of an increase. It’s not good news for plan sponsors,” he said.

The premiums include a flat, per-participant rate and a variable rate based on the plan’s underfunded level. “The per-participant charge is increasing substantially over the next several years, all the way up to $80 per participant. It’ll be even more than that plus inflation,” Waite said.

The flat rate premium for plan years beginning in 2016 is $64 for single-employer plans and $27 for multiemployer plans. In 2017, the premium for single-employer plans will increase to $69, then $74 in 2018 and $80 in 2019. The premium for multiemployer plans will remain $27.

The variable rate will increase from $30 in 2016 to $33 in 2017 and will reach $41 by 2019. After 2019, all rates are subject to indexing, according to the PBGC.

Regarding the variable rate, the question is, “how much can plan sponsors and do plan sponsors want to contribute to the plan to help solve this,’” Waite said. “For every dollar you put in, you get a 4% return in the plan because you’re paying less of this variable premium. The question will be, ‘Where is this money best spent: in the pension plan or invested in the business of the plan sponsor?’”

Waite added that “the plan sponsors paying this are the ones who have plans that are still around and this money to them is money going into a black hole for sponsors who were not able to manage their money as well.”

Waite expects plan sponsors to “look for ways to reduce the number of participants. They’ve done that over the past couple of years by offering lump sums to certain participant groups and also by transferring portions of their liability to insurance companies, such as the retiree liability.”  

In July, the Treasury Department and Internal Revenue Service prohibited pensions from offering lump sum buyouts to retirees who were already receiving benefits.

The budget bill also changes the mortality tables used to calculate the plan’s liabilities. Now, plan sponsors can use mortality tables that reflect the actual experience of the plan and projected trends rather than those issued by the Treasury. Waite said this change will likely only affect the largest plans. “We’re going to need more guidance to see if that plays out and if the largest pension plans take any advantage of that,” he said.

Finally, the budget bill extends the current 10% stabilization rate through 2020 instead of 2017. The rate will increase to 15% in 2021 until it reaches 30% in 2024. According to an analysis by Bloomberg BNA, “this provision raises revenue because minimum employer contributions are reduced and therefore less deductions for contributions will be taken, resulting in higher taxable income.”

Overall, the impact of the budget bill on pension plan sponsors is largely negative, Waite said. “Plan contribution requirements are going to be reduced, but it’s going to have no effect until 2019,” he said.

Even with reduced plan contribution requirements, “it’s several years down the road before that has any immediate impact on plan sponsors. Looking at it from a whole, from the sponsor’s perspective, that is going to be a limited benefit and it’s several years down the road, and [they are] going to be hit within two years with these higher PBCG premiums.”