Corporates were spared one of two pension-related bills that were seen as likely to be included in the $11 billion transportation bill recently signed into law. The surviving revenue-raising bill allows defined benefit plans to reduce their pension contributions, but its smaller estimated haul this time around suggests that companies are instead opting to increase their pension-plan funding.
The biggest concern just a few months ago was that a bill giving the Pension Benefit Guaranty Corporation (PBGC) authority to raise pension premiums by an additional $20 billion over 10 years would be attached the to transportation legislation. That did not happen, but such revenue raising bills rarely vanish for good.
“If you talk to the staff on the Hill, they’ll tell you that the PBCG premium bill is never completely off the table,” said Deborah Forbes, Executive Director at Committee on Investment of Employee Benefit Assets (CIEBA). “We dodged the bullet for now.”
Congress imposed $9 billion of new PBGC premiums on employers in the MAP-21 transportation bill in June 2012, and another $8 billion last December.
The pension-smoothing bill that was signed into law along with the transportation legislation, which provides stopgap funding to replenish the Highway Trust Fund until next May, allows companies to reduce their pension-plan plan contributions, resulting in higher profits and related federal tax revenues. The amount of tax revenue raised from the pension-smooth bill signed into law in 2012 transportation bill was considerably more than the estimate for the most recent one: $9.4 billion compared to $6.4 billion.
That supports the notion that rather than seeking to reduce their pension-plan funding, more companies are instead choosing to step it up. CIEBA’s most recent data shows members paid $825 million in PBGC premiums in 2012 compared to $577 million in 2011, an increase of 43 percent, and those premiums accounted for 12 percent of the total cost of maintaining defined benefit plans compared to 9 percent the year before. Conversations with CIEBA members, Ms. Forbes said, suggest that trend has continued.
In addition, “over the last five years, CIEBA members have contributed to their defined benefit plans more than $100 billion over and above the required minimum contributions,” Ms. Forbes said. “The overall message seems to be that not as many companies took the pension-smoothing route as they CBO thought they would.”
Ms. Forbes explained that the PBGC premium is divided into the flat-rate portion, which can be reduced but removing participants, and the floating-rate part that depends on how underfunded the plan is. Both parts of the premium have increased significantly in recent years. “The way to reduce the variable portion is to fund up the plan, so you don’t have as much underfunding, and you pay less premium,” Ms. Forbes said. “If the plan is 100 percent funded, then you don’t pay anything.”