Defined benefit (DB) plans are subject to annual premiums that must be paid to the Pension Benefit Guaranty Corporation (PBGC). When a DB plan becomes underfunded, sponsors have no choice but to pay an increased premium. Or do they?

The PBGC is the federal insurance agency meant to protect the pensions of DB plan participants in the event of the employer-sponsor's bankruptcy. They assess a flat dollar annual premium for each plan participant, as well as a variable premium based on the plan's funding deficit, known as the PBGC variable rate premium (VRP). Given current market conditions, there may be a palatable way to reduce the VRP, or in the best case, eliminate it.

With interest rates at historic lows, you may have given thought to the idea that now might be a good time to borrow. After all, money is cheap right now. But if you haven t considered borrowing to fund your pension plan, maybe you should. And here's why.

The interest rate you get on borrowed funds can be thought of as being even lower than what you get it at. And that's because if you contribute the cash from the loan into the pension trust, you reduce the underfunding in your DB plan, which in turn reduces the required premium owed to the PBGC. The variable rate premium requires DB plan sponsors to pay 0.9% of the underfunding. That's essentially a 1% tax. To the extent you can reduce the underfunding in your DB plan, you can think of your borrowed rate as being 1% lower than what it truly is, because you won t be subject to the VRP anymore, at least on the dollars contributed.

This strategy works even if you can t fully fund your plan on a PBGC basis. Every dollar you contribute saves the 0.9% tax. Not all plan sponsors have the ability to borrow, and many surely need to put funds to work elsewhere, but you d be remiss not to at least consider this potential savings strategy.