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Likelihood of higher PBGC premium hikes looms.

Earlier this year, the Bush Administration proposed a package of reforms to current pension funding rules. There have been several bills introduced, but the Pension Protection Act of 2005 (H.R. 2830) and The Pension Security and Transparency Act of 2005 (S. 1783) are the consensus bills.

Recently, the Senate attempted to move to a vote on The Pension Security and Transparency Act, but that effort was blocked by senators seeking more employer-friendly changes to the bill. Due to other pressing Senate business, the Senate leadership removed the bill from the agenda until an agreement could be brokered. This has left the Pension Security and Transparency Act up in the air for the time being. In the House, The Pension Protection Act has been voted out of the Education and Workforce Committee, but little action has taken place on the bill. With both pension bills stalled, Congress has shifted its attention to the budget reconciliation process.

Congress passed a budget reconciliation package earlier in the year that instructed House and Senate committees to make mandatory spending cuts and increase revenues to the federal government. One of those revenue increases was to raise the rates companies pay to the Pension Benefit Guaranty Corp. (PBGC). Originally, Congress was calling for more than $18 billion dollars in savings, but FEI's Committee on Benefits Finance (CBF), along with The Pension Coalition, helped persuade Congress not to use increases to the PBGC as a revenue-raiser and to lower the number to $6.7 billion.

Currently, the Pension Protection Act and the Pension Security and Transparency Act call for increasing premiums paid to the PBGC; the Pension Protection Act calls for an increase in flat-rate premiums from $19 to $30, with a phase in of three years and five years if a company was at least 80 percent funded. The Senate's Pension Security and Transparency Act is slightly different, calling for flat-rate premiums increases from $19 to $30 starting in 2006, and asks the PBGC board to recommend adjustments every five years.

On October 18, the Senate Health, Education, Labor and Pensions (HELP) Committee approved a legislative package that will save the government $6.7 billion over five years and $16.4 billion over 10 years by raising PBGC premiums. During that hearing, the Senate HELP Committee voted for an increase in flat-rate premiums from $19 to $46.75 per plan participant beginning in 2006, which is indexed for wage increases.

For multiemployer-plan companies that have defined benefit plans, the flat-rate premiums increase from $2.60 to $8.00 per plan participant. Also, for companies that terminate their plans in bankruptcy and then emerge from bankruptcy, the legislation creates a special termination fee for employers of $1,250 per plan participant per year for three years.

On October 25, the House Education and the Workforce Committee followed the Senate's actions and also raised PBGC flat-rate premium rates from $19 to $30 starting in 2006, and includes that same termination fee for companies that file for bankruptcy. However, the House did include a provision that would allow the PBGC the discretion to raise premiums by up to 20 percent per year during the five-year duration of the bill.

Members of Congress did give themselves the right to reject this PBGC increase by a simple up-or-down vote. This provision was not included in the Senate version of the bill, but could be included when members go to conference to work out a final agreement.

Given that the Senate has increased premium rates up to $46.75 and the House has moved its rates up to at least $30, plus a possible 20 percent PBGC increase every year, companies may want to begin to run the numbers to determine what their new payouts to the PBGC may be starting in 2006.

The pension community is very concerned about the prospect of the PGBC hiking premiums up to 20 percent a year, as well as the prospect of not having a comprehensive pension reform bill enacted this year and resorting back to a 30-year Treasury rate. As one FEI member stated: "It's better to take the hit on the PBGC premiums, which may only cost millions, than have a bad pension bill that could cost companies billions."

Robert E. Lewis Jr. ( is Manager of Government Affairs in FEI's Washington, D.C., office and liaison to FEI's Committee on Benefits Finance.
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Title Annotation:pension benefit guaranty corp
Author:Lewis, Robert E., Jr.
Publication:Financial Executive
Geographic Code:1USA
Date:Dec 1, 2005
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