Pension Benefit Guaranty Corporation: Redesigned Premium Structure Could Better Align Rates with Risk from Plan Sponsors
What GAO Found
Various options are available to make the Pension Benefit Guaranty Corporation's (PBGC) premium structure more risk-based and better reflect the risk of future claims. Historically, PBGC's premiums have not fully reflected the risks PBGC insures against--chiefly that a plan sponsor with an underfunded plan will become bankrupt, forcing the termination of the plan and imposing a claim on PBGC. PBGC's current structure relies largely on a flat-rate premium that is based on the number of plan participants and that assesses rates equally per plan participant across all sponsors. PBGC also charges a variable-rate premium that is based on just one risk factor, plan underfunding. One available option is to further increase rates within this current structure; however, plan underfunding alone is a poor proxy for the risk of new claims. An alternative option is to redesign premiums to incorporate additional risk factors, such as a sponsor's financial strength (as currently being explored by PBGC) or a plan's investment strategy (as is currently done in the United Kingdom).
Moving to a more risk-based system would shift premium costs among sponsors. To analyze the potential effects of different premium structures, PBGC developed a model using data from a sample of about 2,700 plans. Under one possible option explored by PBGC that incorporated an additional risk factor for a sponsor's financial health, financially healthier sponsors would tend to pay less and financially riskier sponsors more--as much as $257 more per participant, depending on their assigned risk level. Some pension experts and plan sponsors we spoke with raised concerns about this potential redistribution of costs. For example, some believe that plan terminations would increase. However, prior work from GAO and others indicates that other factors--including sponsor size, collective bargaining agreements, and overall plan cost--are more important in sponsors' decisions to freeze their plans. Some pension experts and plan sponsors also noted that a more risk-based system could lead to premium increases during poor economic conditions when sponsors are least able to pay, and that it is inequitable for current sponsors to pay higher rates to address costs resulting from prior plan terminations. However, experts also made suggestions about how to address such concerns within a redesigned premium structure, such as by capping premium levels and averaging sponsors' funding levels over multiple years to reduce volatility.
The process of redesigning and implementing a more risk-based premium structure poses potential data and administrative challenges. To help address these challenges, PBGC's model could be further developed to evaluate the implications of incorporating additional risk factors, such as company financial health and plan investment mix. Such efforts could include identifying any additional data needs, as well as exploring the effects on sponsors, including any potentially disproportional hardships on smaller companies resulting from redistributing higher rates to riskier sponsors based on a redesigned structure. Although PBGC is uniquely situated to take on additional rate-setting responsibilities, if Congress were to relinquish some authority in this area, certain safeguards still may be required to help mitigate concerns about PBGC's governance, oversight, and transparency. These safeguards could include additional congressional oversight, soliciting public feedback, and establishing an appeals process for sponsors who wish to challenge their assessment.
Why GAO Did This Study
At the end of fiscal year 2011, PBGC insured the pension benefits of 44 million U.S. workers, retirees, and beneficiaries in about 27,000 private defined benefit plans. PBGC's 2011 net accumulated deficit of $26 billion, coupled with future risks posed by plan sponsors and their plans, threatens PBGC's solvency. To help contain PBGC's deficit, Congress recently passed legislation increasing PBGC premiums. Beyond simply increasing rates, the administration has proposed granting PBGC authority to redesign its premium structure to more fully reflect the risk of new claims. To better understand the issues involved, GAO was asked to examine (1) the options available to adjust premiums to improve PBGC's financial condition; (2) the potential implications of adjusting premiums; and (3) the potential implementation challenges in moving to a more risk-based premium structure.
To conduct this work, GAO reviewed relevant legislation, analyzed PBGC premium data, and interviewed officials implementing other risk-based premium structures in this country and the United Kingdom, as well as numerous experts and plan sponsors reflecting a broad spectrum of perspectives on the topic.
GAO suggests that Congress consider revising PBGC's premium structure to better reflect the agency's risk from individual plans and sponsors, and recommends that PBGC further develop its analyses of possible redesign options. PBGC agreed with our recommendation.
Matter for Congressional Consideration
|To help strengthen the PBGC insurance program, Congress should authorize redesign of PBGC's premium structure to more fully reflect the risk posed by plans and sponsors to the agency, such as by providing for the incorporation of additional risk factors.||In July 2012, December 2013, and November 2015, Congress passed premium increases (P.L. 112-141, P.L. 113-67, and P.L. 114-75, respectively) to better reflect the risk posed to the Pension Benefit Guaranty Corporation by certain defined benefit pension plans and plan sponsors. Congressional requestors told GAO that GAO-13-58 was instrumental in their deliberations and influenced the PBGC premium increase sections of the legislation. While the premium structure has not changed, premiums have increased to more fully reflect the risk posed to PBGC's single-employer insurance program by plan sponsors.|
|In addition, to improve PBGC's ability to collect key information that may be necessary to help the agency estimate its risk exposure to future claims and strengthen implementation of any changes to the premium structure, Congress should provide 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 section 4010 of ERISA.||As of November 2019, Congress has taken no action related to this particular matter.|
|Moreover, to better understand the mechanics of how best to incorporate additional risk factors, improve transparency, and help inform the evaluation of the various redesign options, Congress should establish 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 PBGC's deficit.||In July 2012, Congress passed MAP-21 (P.L. 112-141). MAP-21 made a number of changes to PBGC's governance structure, including requiring PBGC to establish a risk management officer and participant and plan sponsor advocate positions. MAP-21 also required that PBGC's new participant and plan sponsor advocates to report to Congress annually and that PBGC obtain annual peer review of its insurance modeling systems. While an independent premiums advisory committee has not yet been established, the addition of a risk management officer and participant and plan sponsor advocate positions will provide additional perspectives to assist PBGC and its existing seven-member Advisory Committee to represent the views of labor, plan sponsors, and the general public when considering premium rates.|
Recommendations for Executive Action
|Pension Benefit Guaranty Corporation||To enhance understanding and better inform debate on the possible effects of moving to a more risk-based premium structure, during consideration of various redesign options and after a redesign may be authorized, the Director of PBGC should continue to develop PBGC's hypothetical model, analyzing various premium redesign options and their impacts on sponsors, and report the results to Congress. As part of these analyses, 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.||
PBGC agreed with this recommendation and took a number of steps to continue developing its risk-based premium model and to report to Congress on these developments. These steps include: 1) reviewing the risk factors used by the UK Pension Protection Fund in developing premiums and considering ways in which they could be added to PBGC's single-employer model, 2) incorporating risk-based approaches to PBGC's revised requirements for sponsors of single-employer plans that must report certain corporate events to PBGC and incorporating specific waivers of reporting requirements for low-risk plan sponsors in a 2015 final regulation, 3) worked with Congress to facilitate substantial increases to single-employer premium rates through recent legislation that have worked to make the Variable Rate Premium (VRP) more risk related, in that financially healthy companies may choose to fund their plans, perhaps by borrowing, rather than paying the VRP, and 4) exporting concepts from the single-employer risk analysis model to a similar model for multiemployer premiums; using this and other tools to provide technical assistance to Congress for its examination of alternative premium structures, rates, and limitations before enactment of the Multiemployer Pension Reform Act of 2014 (MPRA), which doubled the multiemployer premium rate. PBGC has also taken some steps to address potential hardships for smaller companies in designing more risk-based premiums. Specifically, PBGC officials say they recognize the need to prevent hardships for small employers with higher default risks that might result from more risk-based premiums, and they propose two approaches that they believe would alleviate such concerns: 1) allowing a phase-in period to allow for enough time for the sponsors to improve the funded status of the plan and to prepare for the premium increase, and 2) using a different premium cap (lower for smaller companies) on the premium increase for smaller companies. As PBGC continues to explore various options for more risk-based premiums, we would urge further study of the nature and extent of potential hardships for smaller companies, so that PBGC can better evaluate any comments received and help ensure that whatever option may be adopted will adequately and appropriately address the concerns of smaller firms in its design.