{"id":1187,"date":"2013-04-23T13:20:01","date_gmt":"2013-04-23T18:20:01","guid":{"rendered":"http:\/\/pensionblog.com\/?p=1187"},"modified":"2013-04-23T13:20:01","modified_gmt":"2013-04-23T18:20:01","slug":"evaluating-pbgc-premium-options-in-advance-of-big-increases","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2013\/04\/23\/evaluating-pbgc-premium-options-in-advance-of-big-increases\/","title":{"rendered":"Evaluating PBGC Premium Options in Advance of Big Increases"},"content":{"rendered":"

<\/p>\n

<\/p>\n

\"Which<\/a>Each year, defined benefit (DB) pension plan sponsors must pay pension insurance premiums to the Pension Benefit Guaranty Corporation (PBGC). In light of large PBGC premium rate increases in 2013 and future years, plan sponsors should carefully evaluate their options before proceeding with their next premium payment.<\/p>\n

Background<\/b><\/span><\/p>\n

There are two components to annual PBGC premiums:<\/p>\n

1. Flat rate premium based on the number of participants<\/p>\n

2. Variable Rate Premium (VRP) based on the plan\u2019s unfunded vested liabilities<\/p>\n

As a result of last year\u2019s Moving Ahead for Progress in the 21st<\/sup> Century Act (MAP-21)<\/a>, PBGC premium rates are scheduled to increase sharply over the upcoming years. Below is a table showing a summary of upcoming PBGC rate increases.<\/p>\n

\"MPGC<\/a><\/p>\n

Potential Strategies to Manage PBGC Premiums<\/b><\/span><\/p>\n

Pension plan sponsors generally don\u2019t like to pay PBGC premiums because it is money that could otherwise be spent on increased funding for the plan. With this in mind, here are some important issues to consider before proceeding with your next PBGC premium filing:<\/p>\n

1.<\/span> Unfunded liabilities for the VRP can be calculated using \u201cstandard\u201d PBGC interest rates (snapshot rates) or \u201calternative\u201d rates based on a 24 month average of the snapshot rates. Once you choose a method, you have to stick with it for at least 5 years. Since 2008 was the first year that plan sponsors could elect the \u201calternative\u201d method, 2013 is the first year that they can make an election to switch back to the \u201cstandard\u201d rates (though it likely won’t be advantageous to do so).<\/p>\n

2.<\/span> Over the long-term, both interest rate methods should produce similar VRP amounts even though the smoothed alternative interest rates will lag the standard rates. When interest rates are falling, VRPs based on the alternative interest rates should be lower than those using standard rates. The opposite will be true in a rising interest rate environment.<\/p>\n

3.<\/span> Sponsors of small pension plans (fewer than 100 participants) that haven\u2019t completed their 2012 PBGC premium filing can actually lock-in beneficial VRPs for two years. Their 2012 premiums aren\u2019t due until April 30, 2013 so they can estimate their 2012 and 2013 premiums under both the standard and alternative methods and see which one is the most economical.<\/p>\n

4.<\/span> Before switching interest rate methods just to get lower 2012 and\/or 2013 VRPs, plan sponsors should be aware that it\u2019s less expensive to be underfunded now than in 2014 or later years. That\u2019s because the VRP premium rate is doubling in the next two years (see table above), which could wipe out any short-term VRP savings this year.<\/p>\n

How could this strategy backfire? Consider a plan that switches to the alternative VRP method in 2013 in order to lower their unfunded liability by $1M. This would decrease their 2013 VRP by $9K (i.e., $9 per $1,000 in unfunded liability).<\/p>\n

Now suppose that interest rates increase before 2014. The standard interest rate method would immediately use those higher interest rates to calculate 2014 VRPs. The alternative rates would lag and be lower than the standard rates, which would produce higher unfunded liabilities. Let\u2019s suppose that the alternative method 2014 unfunded liability is now $1M higher than using the standard method. This means that the alternative method 2014 VRP would be $12K higher (i.e., $12 per $1,000 unfunded liability since the VRP rate increases in 2014) and you end up with a net loss of $3K on VRP for the two plan years.<\/p>\n

Next Steps<\/b><\/span><\/p>\n

What\u2019s a plan sponsor to do? The 5-year commitment to the \u201cstandard\u201d or \u201calternative\u201d interest rate method means you can\u2019t guarantee lower PBGC VRPs using one or the other. However, you should evaluate your options each year. If cash is tight and interest rates are on the move, it may be worth choosing one method or the other for some short-term PBGC premium savings with the knowledge that doing so could expose you to higher premium rates in upcoming years.<\/p>\n","protected":false},"excerpt":{"rendered":"

Each year, defined benefit (DB) pension plan sponsors must pay pension insurance premiums to the Pension Benefit Guaranty Corporation (PBGC). In light of large PBGC premium rate increases in 2013 and future years, plan sponsors should carefully evaluate their options before proceeding with their next premium payment. Background There are two components to annual PBGC […]Read More… from Evaluating PBGC Premium Options in Advance of Big Increases<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3,4,7,6],"tags":[36,55,56,57,29,20,21,58,49,50],"acf":[],"yoast_head":"\nEvaluating PBGC Premium Options in Advance of Big Increases - Via Actuarial Solutions<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/viaactuarial.com\/2013\/04\/23\/evaluating-pbgc-premium-options-in-advance-of-big-increases\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Evaluating PBGC Premium Options in Advance of Big Increases - Via Actuarial Solutions\" \/>\n<meta property=\"og:description\" content=\"Each year, defined benefit (DB) pension plan sponsors must pay pension insurance premiums to the Pension Benefit Guaranty Corporation (PBGC). 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