Corporate Pensions Become More Expensive Under New U.S. Budget Deal

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The U.S. House of Representatives passed a two-year budget deal on Wednesday, and if the bill becomes law, it has implications for corporate pensions.

The deal levies higher fees on companies with defined benefit pension plans, and higher penalties on underfunded corporate plans.

Details from the Wall Street Journal:

According to the proposed budget, companies that have defined benefit pension plans would have to increase the fees they pay to the Pension Benefit Guaranty Corp. by about 25%. Companies with pensions will pay $80 per person in their plan by 2019, up from $64 in 2016.

“The increases are tough,” said Alan Glickstein, a senior retirement consultant at consulting firm Towers Watson & Co.

Those fees will apply to companies regardless of funded status.

Meanwhile, companies that are underfunded, meaning the value of the assets in their plans don’t match the expected liabilities, will have to pay a penalty that jumps to 4% in 2019 from 3% today. The increases come on top of regular increases that are tied to inflation. That means a company with a pension that is $100 million underfunded would pay at least $4 million in penalties in 2019.

All told, the fee increases will yield roughly $1.7 billion in revenue for the government, according to the Congressional Budget Office’s analysis.

“The total PBGC fees that a pension plan sponsor is facing over the life of the fund, is now material,” said Caitlin Long, head of the pension solutions group at Morgan Stanley . “Most executives do not expect that this is the last increase.”

The high cost of DB plans to corporations has contributed to the boom in pension risk transfers.

 

Photo by  Bob Jagendorf via FLickr CC License

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