Go Big or Go Home: Strategically Coping with Escalating PBGC Premiums

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Introduction

Timing is everything. In retrospect, the year 2008 was just about the worst imaginable timing for implementing the Pension Protection Act’s highly market-based pension funding requirements. Arguably because of that timing (though tax revenue might also have had something to do with it), when you fast forward nearly a decade to 2017, those initial contribution minimums have been effectively declawed by seemingly endless waves of pension funding relief. But there’s a catch (well, there are actually several catches, but we’ll focus on the most tangible one): similarly relentless rounds of Pension Benefit Guaranty Corporation (PBGC) premium hikes mean that sponsors habitually utilizing the relief tend to get burned.

In the pages that follow, we’ll review only the most strategically relevant intricacies of PBGC premium calculations, with an emphasis on how the structure of the premiums shapes plan sponsor incentives. We’ll also weigh the primary options at sponsors’ disposal for lessening the sting of rising premiums. The analysis will prove most relevant for sponsors of the many plans currently impacted by the Per-Participant Cap on PBGC Variable-Rate Premiums, but is also applicable for any U.S. corporate (single-employer) defined benefit pension plan sponsors subject to PBGC premiums.

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