Reuters Money

Can you count on your pension when it’s time to retire? I get that question often from private sector workers worried about their pension plans in the wake of the financial crisis and 2008 market meltdown.

They’re surprised when I tell them not to worry. Nearly all private sector defined benefit (DB) plans are backed by the Pension Benefit Guaranty Corporation (PBGC), a little-known federally sponsored agency that insures nearly all private sector plans. If you work for a company that goes belly up, the PBGC takes over the plan and its obligations; while some higher-income workers take a haircut on benefits in those situations, most workers get 100 percent of promised benefits.

By law, the PBGC is funded entirely through insurance premiums paid by plan sponsors. But the agency has been chronically underfunded due to a mismatch between the premiums charged and the risks it manages. Premium levels are set by Congress, and PBGC has no control over the type of risk it insures. “The PBGC is a rare kind of insurer, in that it has no control over its risks or what it can charge ,” says Douglas Elliott, a fellow in economic studies at The Brookings Institution.

In 2010, the PBGC paid out nearly $6 billion in benefits to more than 800,000 beneficiaries; it’s also responsible for future payments to another 700,000 workers who haven’t retired yet. Plan sponsors currently pay a flat-rate annual premium of $35 per plan participant, plus another $9 for each $1,000 in underfunding. That figure varies considerably among plan sponsors, but averages out to a total annual premium of $65 per year for each employee.

The PBGC reported a gap of $23 billion between assets on hand and its long-term obligations to pension recipients for the federal fiscal year 2010. The agency has plenty of money to meet its near-term obligations, but worries about PBGC flare whenever very large plans run into trouble. For example, if the federal government hadn’t bailed out General Motors and Chrysler, PBGC’s assumption of the companies’ pension obligations would have roughly doubled the agency’s funding gap.

The Obama Administration’s 2012 budget proposal calls for a $16 billion boost in premiums over 10 years – but also seeks permission for PBGC to set premiums without Congressional approval, via a process similar to the one used by the Federal Deposit Insurance Corp. PBGC also proposes developing a new approach to risk-based pricing for weaker pension plans.

That approach is endorsed by the President’s National Commission on Fiscal Responsibility and Reform, which identified the PBGC’s long-term imbalance as a threat to the federal government’s financial health and expressed concern that a government bailout of the fund might be needed at some point.

The commission noted that PBGC premiums are “much lower than what a private financial institution would charge for insuring the same risk.” PBGC Director Joshua Gotbaum puts it this way: “Other than those who pay premiums, there is no one who thinks the rates are high enough to cover our obligations.”

PBGC’s proposal faces opposition from plan sponsor groups that want Congress to remain in control of premium levels and oppose rate hikes. They argue that DB pensions are already a disappearing breed in the private sector, and that higher rates could encourage even more plan sponsors to shift away from pensions and toward defined contribution benefit plans, such as 401(k)s.

“It would raise plan sponsor overhead,” says Arthur Noonan, a partner at Mercer, the employee benefits consulting firm. “The more expensive it becomes, the more you have to question if the cost relative to the benefit is worthwhile. This could be one more reason for plan sponsors to exit.”

Gotbaum points out that PBGC premiums represent a tiny fraction of total employer compensation expense, and that increases just aren’t a significant factor in plan sponsor commitment to DB programs one way or the other. PBGC data shows that premiums account for just one cent of the $28 in average total private sector hourly labor costs last year. “Even if we doubled premiums, the idea that would put plans out of business is malarky,” Gotbaum says.

Elliott agrees. “You hear this complaint repeatedly,” he says. “A few years ago, when there was a bitter controversy over another proposed rate hike, I calculated that most companies spent more on toilet paper every year than they did on PBGC premiums. The amounts we’re talking about are tiny compared with the size of the defined benefit system.”

Alan Glickstein, a DB pension expert at benefits consulting firm Towers Watson, acknowledges that premiums alone probably aren’t a decisive factor. But he says premium hikes must be considered in the broader context of an over-burdened system.

“Plan sponsors feel over-regulated,” he says. “Anything added on is going to be viewed negatively and with suspicion. In this case, it’s not just more complexity, but a dramatic increase in premium outlays. You do wonder when the next regulatory burden will drive plan sponsors to say they’ve reached the end of their rope.”

Glickstein argues for caution against taking steps that would further reduce the presence of DB plans in the private sector – which already cover fewer than 20 percent of all workers. “This is a time to support the DB system, because it has a long history of being the right vehicle to provide retirement income. We should be careful not to kill the golden goose.”