The Pension Benefit Guaranty Corporation (PBGC) recently released the premium rates for the 2017 premium filing year. Each defined benefit plan sponsor must pay annual premiums if insured by the PBGC. Sponsors of single-employer and multiple-employer plans pay premiums consisting of two parts: (1) a flat-rate premium (FRP), equal to a fixed dollar amount per plan participant, and (2) a variable-rate premium (VRP), based on a percentage of unfunded liability. The latter part is limited by a cap that acts akin to the FRP, where the VRP cannot exceed a fixed dollar amount per plan participant. Multiemployer plans are only subject to the FRP.

Single-employer and multiple-employer plan sponsors will incur a 2017 FRP of $69 per plan participant (a 7.8% increase from the $64 premium paid in 2016). The 2017 VRP has increased to 3.4% of unfunded liability (a 13.3% increase from the 3.0% rate paid in 2016). The per-participant cap on VRPs increased 3.4% from $500 to $517 for the 2017 premium filing year.

Since 2012, single-employer and multiple-employer plan sponsors have seen sharp increases in PBGC premiums, which were written into funding relief rules under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and subsequent relief under the Bipartisan Budget Act of 2015 (BBA). These laws called for scheduled increases in premiums along with indexing for inflation. Flat-rates have nearly doubled since the pre-MAP-21 level of $35 per plan participant in 2012; while the variable-rate of 3.4% has almost quadrupled since 2012. Such sharp increases in the variable-rate have resulted in VRPs approaching the more modestly increasing per-participant cap introduced by MAP-21 for many plan sponsors. This makes de-risking strategies that reduce the number of plan participants (such as terminated vested lump-sum windows and annuity purchases for retiree populations) more attractive. This is because reducing the number of participants in the plan decreases the FRP and may also lower the VRP if limited by the cap.

Being limited by the per-participant VRP cap can offer some advantages to plan sponsors hypersensitive to cost volatility. De-risking strategies such as spin-offs and partial plan terminations have been developed to reduce premiums and target these advantages. Capped VRPs are generally less volatile than uncapped VRPs. Such premiums are based on participant counts, which are likely to be relatively stable from year to year (and are actually expected to decrease in a plan with frozen participation). They are not subject to the market volatility inherent in asset returns and liability, which is determined using market-related interest rates. Capped VRPs are also not subject to the sharp scheduled increases outlined in BBA. They are subject to increases due to inflation, which are typically more modest than the scheduled VRP increases.

Multiemployer plan sponsors will also incur higher 2017 PBGC premiums. Taft-Hartley plan sponsors will experience an increase in FRPs of 3.7% from $27 to $28. The 2017 level represents a 211% increase over the 2012 PBGC premium rate of $9 per plan participant. Large increases in premiums were enacted through the Multiemployer Pension Reform Act of 2014 (MPRA) as a response to the PBGC's dire multiemployer program situation. According to a recent issue brief from the American Academy of Actuaries, the program is projected to become insolvent within eight years partly due to historically inadequate premiums. As a result, the PBGC will not be able to support fully guaranteed benefits for troubled multiemployer plans.

The 2017 premium filing year will not be the last time rates increase; more premium rate increases are scheduled in the future. All PBGC premium rates will increase because of inflation; however, the FRP and VRP for single-employer and multiple-employer plans have additional scheduled increases. The FRP for single-employer and multiple-employer plans is scheduled to increase to $74 and $80 per plan participant in 2018 and 2019, respectively (ultimately a 129% increase over the 2012 level). The VRP is scheduled to increase to 3.8% and 4.2% of unfunded liability for 2018 and 2019, respectively (ultimately a 367% increase over the 2012 rate). Multiemployer premiums are currently only indexed to inflation with no scheduled escalations. However, according to the same issue brief from the American Academy of Actuaries, increases of around six times current levels would be necessary for the program to remain solvent through 2035, with even larger increases needed for longer-term solvency and protection from adverse experience.

The 2017 PBGC premium rates represent a significant increase from where they were only five years ago. This has led to the development and implementation of various de-risking strategies aimed at reducing the cost of maintaining defined benefit plans. Due to regulated increases, anticipated inflation, and uncertainty within the PBGC's multiemployer program, higher premiums are expected for years to come.