The U.S. corporate single-employer defined benefit pension system has undergone a massive shift in recent decades. Many companies have stopped offering a DB pension benefit to new or existing employees, often due to regulatory, accounting, or financial market-related factors, and instead have substituted a defined contribution  plan. This should not be news to anyone that has followed the evolution of the U.S. retirement system.

Over the past 10-plus years, another shift has emerged with respect to the DB pension system. An increasing number of plan sponsors have been seeking to shrink their plans or terminate them entirely by purchasing a group annuity for their participants from a life insurer. In doing so, participants that are covered by the annuity are legally removed from the DB plan and the obligation to pay the monthly pension payment falls to the insurance company. This market for annuitization, or pension risk transfer as it is also called, has grown substantially over the past decade.

While there have been several factors influencing this behavior by plan sponsors, one factor impacting many has been the increase in the cost of administering the DB plan itself. In particular, all plan sponsors are required to pay what are known as flat-rate premiums to the Pension Benefit Guaranty Corporation, the governmental insurer of private DB pension plans. Flat-rate premiums are paid annually on every participant in the plan, irrespective of the funded status of the plan, or the ratio of the fair value of plan assets to the present value of pension obligations.

Importantly, the premium rates are set by the US Congress, not the PBGC itself. Various actions by Congress, including inflation-adjusting the rate each year, have resulted in the per-participant premium increasing to $101 in 2024 from $35 as recently as 2012, a greater than 9% compounded annual growth rate  during that period. Given this rising cost, the economics of keeping participants in the plan versus transferring them to an insurance company, which does not incur the PBGC flat-rate premium, often tilts towards the latter. A chief financial officer that sees any cost for its organization increasing at a 9% CAGR for more than a decade is likely to consider actions to reduce or eliminate it.

There may be several motivations for a sponsor to transfer some or all of its participants to an insurer through an annuitization transaction, and risk transfer is certainly a valid and important tool in the pension risk management toolbox. Sponsors are usually best served, however, when they have multiple options for managing their retirement programs and long-term obligations. Nonetheless, some sponsors might almost feel compelled to undertake one of these transactions today due to the substantial increase in premium costs in recent years.

It should be noted that the PBGC’s single-employer program has seen a deficit of more than $29 billion at the end of fiscal year 2012 swing to a surplus of almost $45 billion in 2023. The PBGC projects that surplus to exceed $60 billion by 2032, and it shows “no scenarios in which the Single-Employer Program runs out of money within the next 10 years.”

Given this position of strength, a moderating of flat-rate premiums may be warranted. Indeed, various employer groups, including the Committee on Investment of Employee Benefit Assets and the American Benefits Council, have been advocating for adjusting premiums. This includes potentially simply lowering flat-rate premiums, providing premium holidays, and linking premiums to the financial status of the PBGC’s single-employer system.

In addition, even though the premiums go directly to the PBGC, they count as general revenue for the federal government. Lowering the premiums would therefore hit the overall federal budget. Moving the premiums “off budget” would mean any changes would not have a budgetary impact, perhaps mitigating any hesitation to lower them or, at a minimum, stopping them from rising further.

We believe plan sponsors could use some flexibility when managing their retirement programs. Reducing PBGC premiums for a system that is notably in surplus may make it easier for sponsors to consider retaining some pension liabilities, rather than transferring them to an insurer, thereby providing the employers options to decide on the best course of action based on their specific goals and objectives.

At the same time, employees and retirees are increasingly being engulfed by what we refer to as the “Financial Vortex,” in which a swirl of competing financial priorities make it difficult for individuals to save for retirement. These priorities can include paying down debt, saving for a child’s college education, assisting other family members financially, and dealing with emergency expenses. Our 2023 Retirement Survey & Insights Report, which surveyed more than 5,000 working and retired Americans collectively, revealed that many individuals remain unprepared for retirement and have a strong desire for guaranteed income.

A DB pension can play a crucial and complementary role to DC plans for employees preparing for retirement, in our view. Lowering the costs around maintaining a DB plan could not only provide plan sponsors with greater flexibility with respect to how to manage their legacy obligations, it might also spur some organizations to consider offering this benefit again. This may be a welcome development for many employees who seek additional forms of income in retirement.

Mike Moran is the senior pension strategist at Goldman Sachs Asset Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.