Bush administration's plan hits healthy companies far harder than weaker ones
Premiums that financially healthy companies in the United States pay to the Pension Benefit Guaranty Corporation (PBGC) for their defined benefit plans would increase by more than twice those of their weaker counterparts under the Bush administration’s proposal to overhaul pension funding rules, according to a new analysis by Watson Wyatt Worldwide.
The administration’s pension reform proposal, announced earlier this year, is designed to ensure employers keep pension benefit promises and to protect the PBGC from a taxpayer bailout. The proposal would overhaul pension funding rules and restructure premiums that employers pay to the PBGC. Currently, all single-employer pension plans pay a flat rate PBGC premium, although employers with “severely” underfunded plans may also pay a variable premium.
Under the proposal, all employers with pension plans would see the flat rate premium increase. Companies with underfunded plans would also pay a variable premium based on the total dollar amount of the underfunding. In addition, a company with a below-investment-grade credit rating would be deemed “financially weak” and would face stricter requirements than a “financially healthy” company.
The Watson Wyatt analysis of 471 Fortune 1000 companies with defined benefit plans shows that the actual effect of the proposal would be to disproportionately increase the financial burden on healthy companies compared with their weaker counterparts. Healthy companies would see their total PBGC premiums (variable plus fixed) increase 240 per cent under the proposal, more than double the 113 per cent increase for financially troubled employers. The analysis defined financially troubled employers as those having a below-investment-grade bond rating. Of the companies studied, 106 had below-investment-grade bond ratings.
“While the pension funding environment desperately needs fixing, we believe that the administration’s proposal will likely damage an already weakened defined benefit system,” said Sylvester Schieber, U.S. benefits practice director at Watson Wyatt and one of the two researchers who conducted the analysis. “The proposal offers little incentive for companies without a pension plan to set one up. Even worse, the added burden placed on healthy companies might lead them to terminate their pension plans.”
Schieber notes that the proposed PBGC variable premium structure does not parallel how most insurance premiums are structured. For example, just as healthy or low-risk individuals pay lower premiums for medical insurance coverage, financially healthy companies should pay lower premiums.
“By disproportionately allocating the financial obligation, the administration would force healthy companies to subsidize weaker ones far more than in the current system,” said Julia Coronado, senior research analyst at Watson Wyatt and co-author of the study. “Pensions provide an essential stream of income for many retirees. While it’s important to keep the PBGC healthy, responsible companies that honor their pension commitments should not be unduly penalized.”
The administration’s pension reform proposal, announced earlier this year, is designed to ensure employers keep pension benefit promises and to protect the PBGC from a taxpayer bailout. The proposal would overhaul pension funding rules and restructure premiums that employers pay to the PBGC. Currently, all single-employer pension plans pay a flat rate PBGC premium, although employers with “severely” underfunded plans may also pay a variable premium.
Under the proposal, all employers with pension plans would see the flat rate premium increase. Companies with underfunded plans would also pay a variable premium based on the total dollar amount of the underfunding. In addition, a company with a below-investment-grade credit rating would be deemed “financially weak” and would face stricter requirements than a “financially healthy” company.
The Watson Wyatt analysis of 471 Fortune 1000 companies with defined benefit plans shows that the actual effect of the proposal would be to disproportionately increase the financial burden on healthy companies compared with their weaker counterparts. Healthy companies would see their total PBGC premiums (variable plus fixed) increase 240 per cent under the proposal, more than double the 113 per cent increase for financially troubled employers. The analysis defined financially troubled employers as those having a below-investment-grade bond rating. Of the companies studied, 106 had below-investment-grade bond ratings.
“While the pension funding environment desperately needs fixing, we believe that the administration’s proposal will likely damage an already weakened defined benefit system,” said Sylvester Schieber, U.S. benefits practice director at Watson Wyatt and one of the two researchers who conducted the analysis. “The proposal offers little incentive for companies without a pension plan to set one up. Even worse, the added burden placed on healthy companies might lead them to terminate their pension plans.”
Schieber notes that the proposed PBGC variable premium structure does not parallel how most insurance premiums are structured. For example, just as healthy or low-risk individuals pay lower premiums for medical insurance coverage, financially healthy companies should pay lower premiums.
“By disproportionately allocating the financial obligation, the administration would force healthy companies to subsidize weaker ones far more than in the current system,” said Julia Coronado, senior research analyst at Watson Wyatt and co-author of the study. “Pensions provide an essential stream of income for many retirees. While it’s important to keep the PBGC healthy, responsible companies that honor their pension commitments should not be unduly penalized.”
