Moody’s Predicts PBGC Premiums Will Become Unaffordable

Following a recent announcement by the Pension Benefit Guarantee Corporation (PBGC) that its multiemployer pension insurance fund deficit had increased by $10 billion to $52 billion as of the fiscal year ended September 30, credit ratings agency Moody’s says this is credit negative for multiemployer plan sponsors because it shows the overall worsening trend in multiemployer pension performance.

In its recent Credit Outlook report, the ratings agency notes that PBGC premiums have increased by nearly 340% over the previous eight years, and they reduce plan sponsors’ annual free cash flow by more than $270 million.

Although the single employer fund has its problems—$110 billion in net liabilities covered by $86 billion of assets—it is not in as dire shape as the multiemployer pension plan (MEPP) fund. At the end of fiscal 2015, the MEPP fund disclosed $54 billion in net liabilities and only $2 billion in assets.

The $54 billion liability is split among plans currently receiving financial assistance, plans that have terminated but have not yet started receiving financial assistance from the PBGC, and ongoing plans (not terminated) that the PBGC expects will require financial assistance in the future. In addition to those 160 plans, the PBGC estimated that it is reasonably possible that other MEPPs may require future financial assistance in the amount of $20 billion.

NEXT: Premiums will become unaffordable

MEPP premiums have risen by a compound annual growth rate of 16% to $27 per plan participant by the end of 2016 from $8 in 2007. Because the PBGC covers approximately 10 million MEPP participants, this $27 translates into revenue of only $270 million a year, Moody’s notes. “Given the size of the deficit, such premiums will almost inevitably go up, quite possibly to unaffordable amounts, which will be a credit negative for sponsoring companies,” the report says.

However, Moody’s predicts that despite current and potential future premium increases, there will come an inflection point where plan sponsors will not be able to afford premiums and the PBGC will run out of money. The PBGC estimates there is a greater than 50% chance it will be insolvent by 2025, and extrapolates a 90% chance of insolvency by 2031.

Moody’s notes there is positive news for sponsors of some MEPPs in the Multiemployer Pension Reform Act of 2014 (MPRA). The MPRA established a new process for MEPPs to temporarily or permanently reduce pension benefits if the plan is projected to run out of money.

Central States Southeast and Southwest area pension plan (Central States) was the first MEPP to file for a reduction in benefits under the MPRA. Moody’s expects more applications to be filed seeking benefit reductions. When it looked at the 124 MEPPs from its annual funding update, it identified 13 plans had funding levels below 40% (on a Moody’s-adjusted basis), a level at or weaker than Central States.