PLANSPONSOR - April/May 2018 - 83

were the low-hanging fruit for a while, "
says McDonald, noting that interest-rate
and mortality assumptions used in the
benefit calculations made for favorable
pricing, but that advantage has disappeared.
" There may still be cases where
terminated vested buyouts make sense,
given how high the PBGC premiums are,
but I think those programs are largely
over. "
Donohue says about 80% of sponsors
have performed such buyouts, and, while
a few might remain, " That well has largely
been tapped. " But not without considerable
effect: His research on 5,000 plans
suggests that such headcount reductions
in 2016 and 2017, combined, have probably
cut $86 million in fixed rate PBGC
premiums for 2018, a saving that could be
augmented by as much as $100 million in
variable rate premiums.
Another way to make plans smaller
is, by way of annuity purchases, culling
the ranks of retirees who are owed small
benefits. With the overhead of PBGC so
high, plans get a relatively large benefit
at small cost: " The fixed premium is the
same whether someone's monthly benefit
is $10 or $1,000, and at $10 a month
you are paying the PBGC $80 a year for
the right to pay that person his benefit, "
Donohue says. " Once you get up to a
benefit of $10,000 a year, the overhead is
smaller, but it's still 80 basis points [bps].
Insurers that pay the annuities don't have
to contend with PBGC premiums, so for
small benefits it's conceivable that an
insurance company could discharge the
benefits more cheaply. "
" A sponsor would generally assume
poor longevity for people with small benefits,
and, combined with the prospect of
eliminating the PBGC costs, this retiree
group is the most efficient to annuitize, "
McDonald says.
" These transactions tend to be
surgical reductions of expenses, " she adds,
" rather than the bigger transactions where
sponsors get liabilities off their balance
sheets. We've seen an uptick in these
small-benefit retiree transactions, and I
" ... contributions are made during
what I call a grace period, until
about eight-and-a-half months
after the end of the year. "
would expect that to continue, because the
premiums only step up to their highest
level next year. There's no real arbitrage
on the premium rates, as there was with
lump sums, but high premiums are still a
problem that is not going away. "
A second approach calls for
" thinking big " -to reduce variable rate
PBGC costs by applying the blunt instrument
of contributions, building assets
and increasing the funded ratio. Donohue
reckons contributions at $83 billion in
2016 for the 5,000 plans he follows, up
33% for the year, including a large share
of voluntary contributions. The resulting
PBGC savings to these sponsors last year
came to more than $1 billion.
With corporate bond rates still so
low, many sponsors find it economical to
borrow toward contributions. " Lower tax
rates for U.S. corporations have raised
the effective after-tax cost of borrowing,
making that alternative slightly less
attractive, " says Meila. Still, most sponsors
will come out ahead from a reduction
in the variable rate charge on the reduced
underfunding.
The efficiency of contributions can
be honed with careful timing, he adds.
" If they're applied to the previous plan
year, when tax rates were higher, there's
a greater benefit from making the contribution
early. "
Bret Linton, principal and consulting
actuary at Milliman in Seattle, concurs.
" Plan sponsors have until September 15
to take advantage of the higher tax rate,
so a lot are considering making a larger
contribution before the rate drops to 21%.
That's going to change sponsor behavior
this year. "
Donohue cites a maneuver that takes
advantage of a discontinuity in the deadlines
for making contributions. " We've
been beating the drum and bringing this
advice to our clients for over 20 years, " he
says. " The idea is that contributions are
made during what I call a grace period,
until about eight-and-a-half months after
the end of the year. If a sponsor makes a
contribution by September 15 of a given
year, rather than, say, in October, it can
be recorded as a contribution for the prior
year. " According to Donohue, nationwide
savings in 2017 from applying simple best
practices concerning grace period deadlines
would have been over $60 million.
" It just requires a small change in
behavior, " he says. " It's real money, and
you can do something with it, like buy out
lump sums, or pay benefits. " -John Keefe
KEY POINTS
* PBGC's fund covering
single-employer plans built up
a deficit after the financial crisis,
and continued and expensive
increases in premiums have
shored it up. But new mortality
tables will increase assumed
longevity, causing the agency's
variable premiums to double.
* Plan sponsors have options,
to control PBGC costs: perform
buyouts to reduce the number of
participants; cull retirees owed
small benefits and have the
insurance company discharge
the benefits more cheaply; and
make contributions, building
assets and increasing the
funded ratio.
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