Investment Strategy On-Demand
Webinar Series
Bipartisan Budget Act of 2013–
PBGC Premium Rate Increases
Ari Jacobs, Aon Hewitt
PBGC Premium Increases in the Bipartisan Budget Act of 2013
Bipartisan
Budget Act of
2013 (BBA)
Two-Year Budget Agreement Enacted on December 26, 2013
 Announced by a House and Senate conference committee on December 10, 2013
 Passed by the House of Representatives (332-94) on December 12, 2013
 Passed by the Senate (64-36) on December 18, 2013
 Signed by the President on December 26, 2013
 Section 703 increases PBGC premiums for single-employer pension plans
Effect on PBGC
Premiums
Second Major PBGC Premium Increase in the Last Two Years
 Flat-rate premiums increase to $57 for 2015 plan years, and $64 indexed thereafter
 Variable rate premiums increase to 2.4% indexed in 2015, and 2.9% indexed thereafter
 The maximum variable-rate premium increases to $500 in 2016, and is indexed thereafter
 The increases raise $7.9 billion of revenue for the PBGC over the next ten years
 In 2012, PBGC increases from MAP-21 raised $10.6 billion over the next ten years
 A proposed link between premiums and plan sponsor financial strength is not included
 A proposal to authorize the PBGC to set future premium rates is not included
Effect on Key
Pension Risk
Management
Strategies
Effect on Funding, Investment, and Settlement Strategies
 Funding—Increases the benefit of making discretionary contributions
 Investment—Increases the risk of keeping return-seeking investments in well funded plans
 Settlement—Increases the benefit of settling liabilities with lump sums or annuities
Investment Strategy On-Demand Webinar Series | February 11, 2014
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PBGC Premium Rate Increases
From 2012 to 2016, the flat premium rate will have nearly doubled and the
variable premium rate will have more than tripled
Plan Year
Flat-Rate
(per participant per year)
Variable-Rate
(per $1,000 of unfunded vested benefits)
2012
$35
$9
2013
$42
$9
2014
$49
$14
2015
$49 (indexed)  $57
$19 (indexed)  $24 (indexed)
2016
$49 (indexed)  $64
$19 (indexed)  $29 (indexed)
The flat premium rate and variable premium rate for 2017+ will be the 2016 values indexed to
National Average Wages.
Beginning in 2016, the variable-rate premium cap will also increase from $400 per participant
(indexed) to $500 per participant (indexed)
Investment Strategy On-Demand Webinar Series | February 11, 2014
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Historic and Projected Flat-Rate and Variable-Rate Premiums
Flat-Rate per Participant Premiums
35
30
50
49
42
64
57
66
54
52
41
19
2005
2006
2012
2013
2014
2015
2016
2017
Variable-Rate Premium, as a Percentage of Unfunded Liability
3.1%
3.0%
2.4%
1.9%
2.0%
2.0%
1.4%
0.9%
0.9%
0.9%
2005
2006
2012
2013
2014
Plan Years Beginning in ____
Pre MAP-21
0.9%
0.9%
Pre-BBA
0.9%
0.9%
2015
2016
Post-BBA
Projections assume 3% annual increases in future National Average Wages
Investment Strategy On-Demand Webinar Series | February 11, 2014
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0.9%
2017
Implications for Key Pension Risk Management Strategies
Funding
Strategy
Consider discretionary contributions to generate a 2.9% rebate
 In 2016 and beyond, each extra $1 in the trust fund reduces PBGC premiums at least 2.9¢
 The reductions continue annually for as long as the plan would have remained underfunded
 If cash is not readily available, it may make sense to capture this 2.9% rebate by
 Borrowing to fund the pension plan ,or
 Consider contributing an “in-kind” asset
Investment
Strategy
Update dynamic investment policies to reduce risk
 Variable premiums penalty for underfunded plans now equal to 2.9% the underfunding
 Well funded plans with risky investments can become underfunded after a single bad year
 Dynamic investment policies reduce investment risk as plan funded status improves
 The potential downside of risky investment strategies in well funded plans, without an equal
and opposite upside, makes well funded plans favor less risky investments
Settlement
Strategy
Settle plan liabilities to reduce flat-rate premiums
 Primary settlement options include paying lump sums and buying annuities
 For each participant settled, the PBGC flat-rate premiums decrease by:
 $57 in 2015
 $64 indexed in 2016 and subsequent years
 Over $700 over the ten year period 2015-2024, assuming 3% National Average Wage
increases
Investment Strategy On-Demand Webinar Series | February 11, 2014
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Next Steps
Analyze
 Project expected PBGC premiums under the current funding and investment policies
 Analyze the impact of revised funding, investment, and settlement strategies
Choose
Appropriate
Strategies
 Funding Strategy—Consider different levels of accelerated funding, borrowing to fund, and in-kind
contributions
 Investment Strategy
– Consider reducing investment risk due to the asymmetric risk-reward tradeoff
– This is especially important if investment policy has not been reviewed since MAP-21
 Settlement Strategy—Consider lump sums windows and annuity buyouts
Execute
 Move forward with optimal risk management strategies
 Monitor the plan’s funded status for future trigger points, such as de-risking events or plan
settlements
Investment Strategy On-Demand Webinar Series | February 11, 2014
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Contact
Ari Jacobs
Senior Partner and Global Retirement Solutions Leader
Retirement Consulting
[email protected]
Investment Strategy On-Demand Webinar Series | February 11, 2014
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Legal Disclaimer
Copyright 2014 Hewitt EnnisKnupp, Inc.
This document is intended for general information purposes only and should not be
construed as advice or opinions on any specific facts or circumstances. The comments in
this summary are based upon Hewitt EnnisKnupp's preliminary analysis of publicly
available information. The content of this document is made available on an “as is” basis,
without warranty of any kind. Hewitt EnnisKnupp disclaims any legal liability to any person
or organization for loss or damage caused by or resulting from any reliance placed on that
content. Hewitt reserves all rights to the content of this document.
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