GAO recommends PBGC adopt risk-based premium structure

 

A Government Accountability Office (GAO) study suggests that Congress consider revising the Pension Benefit Guaranty Corporation’s (PBGC’s) premium structure to better reflect the Agency’s risk from individual plans and sponsors and recommends that the PBGC further develop its analyses of possible redesign options.

The PBGC faces a number of challenges in its role as insurer and protector of defined benefit (DB) plans, the GAO report notes. To remain financially solvent, the PBGC relies on returns on its investments as well as premiums. However, the number of DB plans has been falling and premium rates have not adequately reflected the level of risk posed to the PBGC for losses resulting from new claims.

According to the GAO, if the PBGC’s current financial challenges are not addressed, the Agency could ultimately face insolvency, potentially resulting in a need for legislative changes either to make painful reductions to participant benefits or significant additional increases in premiums, or to provide for taxpayers to cover these costs. By adopting a structure that allows rates to better align with the risk posed by individual plans and sponsors, Congress has an opportunity to help the PBGC contain its deficit and strengthen its ability to remain solvent into the future, the GAO report concluded.

Recommendations for Congress

To help strengthen the PBGC insurance program, the GAO recommends that Congress consider redesigning the PBGC’s premium structure to more fully reflect the risk posed by plans and sponsors to the Agency.

In addition, to improve the PBGC’s ability to collect key information that may be necessary to help the PBGC estimate its risk exposure to future claims, the GAO recommends that Congress consider providing the PBGC with access to additional information needed to assess risk and assist in setting premiums, such as by expanding the criteria requiring plan sponsors to report under ERISA §4010.

Moreover, the GAO report urges Congress to consider establishing an independent premiums advisory committee reflecting a range of perspectives—including, for example, representatives from federal agencies, sponsors, actuaries, private insurers, and labor groups—to assist with such activities as developing the mechanics for incorporating additional risk factors and implementing new rates, as well as delineating a variety of alternative methods to address the PBGC’s deficit.

Recommendation for PBGC

The GAO also recommended that the Director of the PBGC continue to develop its “hypothetical model,” analyzing various premium redesign options and their impacts on sponsors, and report the results to Congress. As part of these analyses, “the PBGC should evaluate the potential effects on sponsors of incorporating additional risk factors, such as company financial health and plan investment mix, and include an assessment to identify any potentially disproportional hardships on smaller companies that may result from the redistribution of higher rates to riskier sponsors,” the GAO report said.

Source: GAO-13-58, “Redesigned Premium Structure Could Better Align Rates with Risk from Plan Sponsors,” November 2012.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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