Employee benefits and retirement plan solutions Trends and Insights Changing the question for PBGC Premium Savings
Changing the question for PBGC Premium Savings

Key considerations for defined benefit (DB) pension plan sponsors looking to save on Pension Benefit Guaranty Corporation (PBGC) insurance premiums in 2023.

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3 min read |

Defined benefit (DB) pension plan sponsors looking to save on Pension Benefit Guaranty Corporation (PBGC) insurance premiums in 2023 may find wisdom in the words of one of the 20th century’s greatest pseudo-Scottish philosophers / professional wrestlers, “Rowdy” Roddy Piper, whose signature tag line at the end of each interview was, “Just when they think they have all the answers, I change the questions!”

The question sponsors are asking the PBGC this year is, “May I please switch from the Alternative to the Standard filing method for determining my variable rate premium?” This can be a financially impactful query since the great interest rate spike of 2022 allows Standard method filers to report much lower liabilities (up to 20%), slashing their tax-like premiums.

Five Year Itch

Though many sponsors will quickly be approved by the PBGC, the answer for some may be “No!” on the grounds that premium filing methods may only be switched every five years. Those moving from the Standard to Alternative filing method during the last half decade (many did in 2019 since Alternative was the less expensive option then) may be out of luck.

Unless, of course, they change the question! (Cue the rousing bagpipe music!)

Alternative Route to Savings

Instead of directly requesting a change in filing method from the PBGC, sponsors can find a different route to lower premiums by changing the basis on which their minimum funding target liability under the Pension Protection Act (PPA) is calculated.

This works because the PBGC Alternative method doesn’t explicitly define the bond rates to be used, but rather references ones used by the plan for PPA minimum funding: “the discount rates that would have been used to determine the ERISA section 303 funding target.”

Most plans technically use 24-month average bond rates for PPA minimum funding which fall through to their Alternative method PBGC calculation. Averaging over 24 months has delayed the recognition of last year’s rate spike which is why the Standard method is currently more favorable.

(Thanks to pension relief laws, these have temporarily been overridden by 25-year average “stabilized” bond rates for minimum funding only. The 24-month average is the legal sponsor election and is still used for PBGC premium purposes.)

Changing the Question...and Questionee

But the 24-month average rates are only one option for calculating PPA funding targets. A second PPA option allows sponsors to use a “full yield curve” based on the same one-month average bond rates underpinning the PBGC Standard filing method.

This means sponsors who are told “No” by the PBGC in their request to change filing methods can still get to the same premium savings (albeit indirectly) by directing a different question to the IRS: “May I adopt the full yield curve to calculate my minimum funding target under PPA, and with it my PBGC Alternative filing method liability?"

Fortunately, adoption of the full yield curve for minimum funding is automatically approved, so the answer from the IRS will always be “Yes!”

Getting to Lower 2023 PBGC Premiums

  PBGC Filing Method PPA Funding Basis PBGC Variable Premium
Current Alternative 24-month avg. Higher
Option 1
(Eligible for PBGC Standard)
Standard 24-month avg. Lower
Option 2
(Ineligible for PBGC Standard)
Alternative Full Yield Curve Lower

Full Yield Curve Funding Risk

Adopting the full yield curve under PPA is effectively permanent and materially affects the behavior of funding target liabilities, so sponsors should clearly understand risks and benefits before making changes. (Your consulting actuary can help.) The switch is expected to have little cash impact for 2023 and may also help larger sponsors avoid onerous PBGC 4010 financial reporting for underfunded plans.

It also increases volatility of future funding target liabilities which can be mitigated through liability driven investment (LDI) strategies. Indeed, heavy LDI users may find the full yield curve makes their future contributions more predictable (in contrast to their experience this year) since the funding target would behave more like the high-quality bonds in their portfolios.

PBGC Premium...You’re Going Down!

“Rowdy” Roddy didn’t respond to requests for comment on this article, but if he had might have said DB plan sponsors can piledrive their 2023 PBGC premiums under either Standard or Alternative filing methods. They just need to be prepared to change the question, and potentially rethink their minimum funding risk management strategy.

Then he probably would have hit somebody with a chair.