Last Call For 2023 PBGC Premium Refunds

Hundreds of pension sponsors saw unprecedented increases in PBGC premiums in 2023. More than 1,000 sponsors have taken steps to avoid this historic premium increase, while another 450 plans still have an opportunity to recover almost $800 million in 2023 premiums.

Why the big increase? It certainly wasn’t because pension plans had become less well-funded. During 2021-2022, Fortune 500 employers erased $165 billion in pension underfunding in aggregate, the best two-year period for pensions this century.

No, the 2023 premium spike was all down to using “24-month average” interest rates to measure pension liabilities for PBGC premium purposes. Because long-term market interest rates spiked from below 3% to above 5% during 2022, 24-month average rates inflated pension liabilities by 15%-25% for most plans in 2023.

In response, two-thirds of plans that could meaningfully benefit from avoiding 24-month average rates for 2023 have already done so. For the remaining 450 plans, we think the issue is worth re-visiting. There could easily be hundreds of thousands or millions of dollars at stake and, in some cases, there is little to no downside to pursuing a 2023 premium refund. But there is a very short deadline on this – action must be taken by October 15, 2024.

A Continuum of Plans

Pursuing a 2023 PBGC premium may not be for everybody. Specifically, plans that are (a) underfunded, (b) invested mostly in “mismatched” assets, and (c) open and ongoing are the most likely to value “liability smoothing”— pursuing a 2023 PBGC refund means, at least temporarily, giving up “liability smoothing” for minimum funding and PBGC premium purposes.

At the other extreme are plans that are (a) well-funded, (b) invested largely in “hedged” assets, and (c) frozen. For these plans, “liability smoothing” has, if anything, negative value.

The 450 plans eligible for a 2023 PBGC refund fall across the continuum, but there are a substantial number of plans in this group for whom we think switching to mark to market and pursuing a refund of 2023 premiums is compelling and well worth the paperwork.

To repeat, the deadline for most sponsors is October 15, but the election process is straightforward. We have published a companion article which explores the issue in greater detail.