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Companies Race to Fund Pensions Before Insurance Premiums Rise

Companies are pouring money into their defined benefit plans to avoid paying increasing PBGC premiums.

  • Amy Whyte

More than 20 percent of corporate pension plans are now overfunded, a sharp increase from last year, according to consulting firm NEPC.

The Boston-based firm’s annual survey of defined benefit plans at companies and health care providers found that overall funded ratios have improved over the last year, in part due to strong global markets. Many increased plan contributions to avoid rising insurance premiums for underfunded pensions, according to NEPC’s survey, released Tuesday.

“Well-funded plans with funded ratios in the mid-90s topped off their plans to avoid premiums,” Brad Smith, head of the corporate practice group at NEPC, said in an interview.

The premiums are what private-sector defined benefit plans owe to the Pension Benefit Guaranty Corp., the government group that insures pension benefits. The PBGC now charges a variable rate of $34 per $1000 in unfunded benefits, plus a per-participant flat fee of $69. Next year, the variable rate will rise to $38 and the flat fee to $74, according to PBGC’s website.

The rates have skyrocketed since 2012, when the flat rate was $35 per person and the variable fee was $9 per $1000 in unfunded pension benefits, the website shows. To avoid these premiums, companies and health care providers have taken such measures as increasing contributions, offering lump sum payments to pension plan participants, and conducting annuity buyouts.

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According to NEPC’s survey, only 2 percent of corporate pensions are now less than 70 percent funded, down from 5 percent last year. Among pension plans managed by health care providers, which generally are more poorly funded, 19 percent are less than 70 percent funded, a decrease from 21 percent last year.

What’s more, 22 percent of corporate pensions reported a funded ratio above 101 percent, more than twice the 9 percent who were overfunded last year. “When I first saw that number, I was shocked,” said Smith.

While the portion of plan sponsors that have offered or are planning lump sum payments decreased from last year, from 87 percent to 75 percent, NEPC found a slight uptick in annuity buyouts, which allow pensions to transfer liability risk to an insurer. This year, 28 percent of surveyed plan sponsors were interested in an annuity buyout, up from 18 percent last year.

The survey also found that private-sector pensions continue to adopt liability-driven investing strategies, which are now used by 59 percent of corporate pensions and 56 percent of retirement plans run by health care organizations. Among corporate plan sponsors, 12 percent were considering the strategy, up from 4 percent last year. The portion of health care providers weighing liability-driven investing strategies fell to 9 percent from 21 percent — a trend NEPC attributed to plan sponsors waiting for interest rates to rise.

Of plan sponsors surveyed, 90 percent used passive investment strategies, though only 40 percent had an allocation greater than 25 percent. Just over three-quarters invested in alternatives such as hedge funds, the consulting firm’s survey found.