Benefit provisions of proposed debt ceiling bill

On October 30 the Senate followed the House and approved a debt ceiling fix that includes increases in Pension Benefit Guaranty Corporation premiums, a modification of Tax Code rules for when plan-specific mortality assumptions may be used, and an extension of Highway and Transportation Funding Act of 2014 (HATFA) interest rate stabilization relief. In this article we discuss this changes.

PBGC premium increase

The 2016 PBGC flat-rate premium is $64 per participant. Under current (pre-debt ceiling bill) law it is to be adjusted for wage growth after 2016. Under the budget agreement, it will increase to $69 in 2017, $74 in 2018, $80 in 2019, and thereafter for national average wage increases.

Underfunded plans must also pay a variable-rate PBGC premium, equal to $30 per $1,000 of unfunded vested benefits for 2016, subject to a $500 per participant cap. Under the agreement, premiums will increase to at least $33 in 2017, $37 in 2018, $41 in 2019, and thereafter for national average wage increases. These amounts are also increased after 2016 for national average wage increases, so the 2019 variable premium is more likely to be $43 or $44.

Results will vary by plan, but these changes are estimated to increase headcount premiums by 10%-15% and variable-rate premiums by 30%-35% as compared with current law.

The due date for PBGC premiums for 2025 would be accelerated by one month to bring premiums for that year within the 10-year budget window.

As we understand it, Congress is proposing these PBGC premium increases simply as a way to fix a budget problem and not because they believe the increases are needed. We note that these changes increase the cost of maintaining a defined benefit plan and put more weight on the ‘termination’ side of the terminate/don’t terminate analysis. (See our recent article Pension plan termination strategy – part 1.)

Mortality assumptions

The bill would amend IRS rules for use of a substitute mortality table (rather than the one prescribed by IRS) by requiring that the test of whether the plan has “credible information” must be “made in accordance with established actuarial credibility theory.” According to the bill, current rules do not do that. In addition, plans would be permitted to make adjustments to IRS-prescribed tables where doing so “reflects the actual experience of the pension plans maintained by the sponsor and projected trends in general mortality experience.”

It’s not entirely clear what this language means, but, it appears that Congress intends to give sponsors more latitude in using plan-specific, non-IRS mortality tables. Certainly the view (of Congress and of sponsors) is that the ability to do so will allow sponsors with such credible experience to mitigate the effect of the adoption of new mortality tables by IRS, probably in 2017. Those new tables, which will reflect mortality improvements, may increase measured liabilities by as much as 10%.

Extension of funding stabilization

2012’s Moving Ahead for Progress in the 21st Century Act (MAP-21) put a ‘floor’ under valuation interest rates. The floor is equal to (1) the average of rates for a 25-year period, (2) reduced by multiplying it by a percentage beginning at 90% and ‘phasing down’ beginning in 2013. HATFA extended the ‘90% period’ through 2017, with phase-down beginning in 2018. The debt ceiling bill would extend the 90% period another three years, through 2020.

The following chart compares current and proposed phase-down percentage rules.

Again, as we understand it, this change is being proposed simply as a budget fix – there was no significant sponsor pressure to extend interest stabilization relief.

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Congress continues to go to retirement benefits to find revenue. As we understand it, this time they started with the end-of-2013 bipartisan budget deal, which included significant PBGC premium increases, using that as a template for this deal. Whether and when this approach – ‘tinkering with retirement to fix the budget’ – will again recur is unclear.