Defined benefit (DB) plan sponsors paid $145 million in Pension Benefit Guaranty Corporation (PBGC) premiums in 2015 alone that could have been avoided, according to a paper from October Three.
The report contends that not optimizing their contribution recording and timing caused plan sponsors to overpay PBGC premiums.
“Minimizing PBGC premiums depends on plans’ maximizing the use of ‘grace period’ contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year,” the report says. “Failure to adopt best practices around quarterly contribution requirements and applying funding balance has caused plan sponsors to overpay PBGC premiums due to not getting full credit for grace period contributions. In many cases, all or part of contributions made to satisfy quarterly contribution requirements could have been characterized as grace period contributions but weren’t. So, plans often report lower asset values than they could have and, as a result, pay higher premiums than they need to.”
Over the six years analyzed by October Three, DB plan sponsors have missed out on more than $700 million in savings. As an example, October Three’s review uncovered a plan ($330 million in assets, 8,300 participants) that owed a variable premium of $2.9 million during 2015, but could have reduced this premium by $685,000 simply by recording grace period contributions differently. “That is, an action that would only take the plan’s actuary minutes to complete, cost this sponsor almost $700,000!” the paper says. October Three notes that the plan paid actuarial fees from the trust during 2015 of $160,000.
October three calls these missed opportunities “recording errors”—plans could have reduced premiums without changing anything they did except for paying attention to quarterly contribution and funding balance rules at the time.NEXT: Accelerating contributions
In addition, October Three contends many DB plan sponsors could have substantially reduced PBGC premiums by modestly accelerating some budgeted contributions (by one to five months) and, again, paying attention to quarterly contribution and funding balance rules. “These ‘push back strategies’ require a modest change in approach from plan sponsors. Over a period of years, differences in contribution amounts due to modest acceleration are insignificant, but PBGC premium savings are not,” the report explains.
The report says potential premium reductions based on push back strategies are more widespread and more significant in terms of total dollars. October Three observed one plan ($4.1 billion in assets, 78,600 participants) that paid a 2015 variable premium of $31.4 million, but could have reduced this premium by almost $1.2 million just by applying best practices to contribution recording and timing.
While October Three says there is some evidence that DB plan sponsors are increasingly adopting best practices in recent years now that PBGC premiums have increased, still its analysis indicates that sponsors continue to overpay premiums by more than $100 million annually, with more than half of eligible plan sponsors overpaying in some fashion.
October Three notes that DB plan sponsors rely on the plan actuary to use best practices, and in these situations knowledge and ability to advise rests with the actuary. “Hence, any sponsor experiencing recording errors is likely not being told the opportunity exists by their actuary and, in turn, is missing an opportunity to reduce their PBGC premium,” the report states.The report, “The PBGC Premium Burden,” may be downloaded from here.