The Pension Benefit Guaranty
Corporation (PBGC) is reducing penalties for late payment of premiums in
an effort to reduce regulatory costs and make it easier for plan
sponsors to maintain traditional pension plans.
As premiums have risen, so have the penalties for late payment because they are calculated as a percentage of the premiums.
The final rule implementing the changes first proposed in April,
is slated for publication in the Federal Register on September 23,
2016. Under the final rule, penalty rates and caps are both cut in half.
For sponsors with good payment histories that pay promptly following
notification of late payment, PBGC will reduce the penalty an additional
80%.
The changes apply to both single-employer and multiemployer
plans, and will apply to late premium payments for plan years beginning
in 2016 or later.
The PBGC explained that currently, it uses a two-tiered penalty structure that rewards self-correction:
If a sponsor corrects a deficiency before PBGC notifies them, a lower rate of 1% of the late payment per month is incurred; and
If a delinquency is corrected only after the company is notified, PBGC charges a higher rate of 5%.
Penalties in the first category are capped at 50% of the late amount, and in the second category, 100%.
The
following example illustrates how the new rule differs from the old
rule. Consider a situation in which a $100,000 premium is paid two
months late.
Scenario 1 (“self-correction”) – The plan
discovered the underpayment and corrected it before PBGC sent notice.
Under the old rule, PBGC would have assessed a $2,000 penalty (1% x
$100,000 x 2 months). Under the new rule, the penalty is half that
amount, or $1,000 (0.5% x $100,000 x 2 months).
Scenario 2 – The
payment was made after PBGC notified the plan that it was past due.
Under the old rule, PBGC would have assessed a $10,000 penalty (5% x
$100,000 x 2 months). Under the new rule, PBGC will assess a $5,000
penalty (2.5% x $100,000 x 2 months).
In addition, if the
sponsor has a good payment history and pays promptly after being
notified of the underpayment, PBGC will automatically waive 80% of that
amount reducing the penalty from $5,000 to $1,000.
“We’re
committed to reducing the regulatory burdens of sponsoring a pension
plan,” says PBGC Director Tom Reeder. “This change is one of the ways we
can help employers that are keeping their defined benefit pension plans
and providing the security of lifetime income for workers and
retirees.”
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Sean Rhoderick, taxable fixed-income investing leader at PNC
Capital Advisors, outlines unique opportunities driven by conflicted central
bank policies and a persistently abnormal rate environment.
Despite years of record-low interest rates and cautiously
optimistic signals from the U.S. Federal Reserve, Sean Rhoderick, chief investment
officer of taxable fixed-income products for PNC Capital Advisors, says there’s
little reason to suspect interest rates will normalize soon.
Acknowledging the hazard in making strong forward-looking predictions, Rhoderick is confident enough to say there’s “more reason than
not to suspect we’ll be hovering around these interest rate levels for a decent
amount of time still.” At least for the intermediate term, he says, investors
will very likely have to accept low returns on fixed-income assets by
historical standards.
“We have seen that the U.S. Federal Reserve is being hesitant
to push rates higher too quickly out of the overhanging fear of stalling growth,”
he tells PLANADVISER, “and very few other central policymakers in other important
markets are likely to be any more aggressive than the Fed.” And so, with institutional
and retail investors alike left waiting for a change in direction, “it makes
sense to think about new types of approaches and exposures.”
At PNC Capital Advisors, Rhoderick says a lot of thought is “going
into credit assets, generally speaking.” He suggests the perceived safety of government
bond securities, on top of the low rate environment, has dramatically reduced
the opportunity to generate returns on cash or cash-like assets that does not also come along
with some real risk.
“We are cautious about corporate debt, of course, but we still
feel it’s an increasingly important asset class for investors to consider,”
Rhoderick explains. “We advocate for a defensive approach that closely considers
moving up in credit quality and shorter in duration. There may be emerging opportunities in asset-backed
securities as well. Shorter maturity securities have given us an opportunity to
take prudent credit risk at very attractive spreads and yields compared to what
is possible in U.S. government bond markets. It’s something we can do carefully
and over the short term.”
NEXT: Making
decisions in a shifting marketplace
Rhoderick observed that, just in the last couple of weeks
alone, there has been yet another big shift in terms of how central bank policymakers are
signaling their intentions for the remainder of 2016 and beyond.
“The European Central Bank [ECB] is clearly unsure of what
to do. The U.S. Federal Reserve is unsure what to do. There are important decisions
to be made in Japan and elsewhere that will not be easy, and so I think we can agree that global
banks in general are very far from moving in anything like a coordinate way
that would promote normalization in rates,” he continues.
Giving some advice directly to retirement plan investors,
Rhoderick says “we all have had to accept a new global yield environment, where
U.S. rates and government securities widely are limited in their prospects for the short and mid-term.” There
are, simply put, limits on what can be accomplished with a traditional approach
to fixed-income investing for the foreseeable future.
“It’s going to be very hard to have a strong sense of
conviction about how to generate safe and steady return in these troubled
markets,” he feels. “Just given all the conflicting influences and the reduction
in importance of the traditional drivers of the marketplace, new challenges and
opportunities are going to continue to emerge. In that respect awareness and
nimbleness will be important.”
Venturing into the territory of specific investment ideas,
Rhoderick suggests as an example that investments with sensitivity to the Libor
rate “could be a powerful tool given everything going on at the U.S. Fed and at
the ECB.”
“From a longer-term, 20-year perspective, the two-year U.S.
Treasury rate and the three-month Libor rate tend to move in a similar fashion,”
he observes. “It is not uncommon for the yield on the three-month Libor to
exceed the yield on the two-year Treasury, in fact.”
NEXT: Distorted
patterns
This pattern of outperformance has historically emerged and persisted more in periods of financial stress, Rhoderick explains, but the uncoordinated
movements at the Fed and ECB and elsewhere have offered a boost.
“While still somewhat modest, this relative spread presents
unique opportunities,” Rhoderick says. “There are several ways to invest in
securities with yields that move in relation to Libor. Examples include
floating-rate notes specifically benchmarked to the one-month/one-month Libor,
as well as short-term instruments such as commercial paper and certificates of
deposit.”
Rhoderick concludes by observing that the long-awaited
deadline for money-market fund reform, approaching on October 14, is yet another source of distortion
for the traditional supply and demand dynamic of capital preservation investing.
“As of that date, institutional prime money-market funds will be required to float
their net asset value, based on the market value of the underlying investments,”
he warns. “By contrast, government money-market funds will be generally
permitted to maintain a stable NAV.”
“The drop in prime money-market fund balances is a
reflection of both forced conversions to government money-market funds and to a
lesser degree investor redemptions. There is considerable uncertainty regarding
what the timing and amount of additional prime-fund withdrawals will be, but
most estimates range from $200 to $400 billion,” Rhoderick concludes. “Given
the need for money-market fund managers to ensure sufficient liquidity in an
uncertain environment, we expect these imbalances to persist well into the
fall ... This will further strain traditional supply and demand dynamics for bond securities.”
A recent white paper penned by Rhoderick tackling some of
these topics is available for download here.