US - Hewitt Associates has expressed grave concerns over government plans to introduce a risk-based insurance premium structure for pension funds and has questioned the gravity of the federal pension insurer's unfunded financial status.
Hewitt Associates consultant Ari Jacobs (picturted) said a risk-based levy could see companies abandon defined benefit pension schemes altogether.
“I think there’ll be more companies saying ‘this is just too much – I’m not going to pay more money, first of all, to satisfy the poorly funded plan’ and then further from that, the plans that are poorly funded or in bad shape may not have the money to pay for this,” he said.
US secretary of Labor Elaine Chao unveiled plans Monday to overhaul the nation’s private defined benefit pension system and prop up the federal insurer, the Pension Benefit Guarantee Corporation, of which she is the chair.
Under the proposals, funding rules would be reformed to ensure companies fully fund their retirement promises and financially troubled companies compelled to pay higher insurance premiums based on the risk of their pension plan terminating.
Jacobs added: “I think it’s far more important for there to be a strong defined benefit system with many employers wanting to stay or even adding into these plans which would help support the PBGC rather than defined benefit plans going away slowly… which would only put the PBGC at further risk.”
In November, the PBGC recorded a record deficit of US$23.3bn for private, single-employer pension plans but Jacobs said the “real risks” posed by the insurer’s financial status were unclear.
“I think there’s definitely some issue with how the PBGC will generally value their unfunded status and whether or not there is the same dire straits out here that some of these reforms would lead you to believe,” he said.
“They use pretty conservative assumptions and are doing things on a short-term basis. Less than five years ago they were in a surplus… so I think the first thing is to really understand their financial status and what their real risks are.”
Consultants and businesses are now waiting for the full details of the plan. Jacobs said: “There seems to be some discussion here potentially about eliminating some smoothing of costs and gains and losses over time, the details of which we don’t have yet; but the concept is certainly troubling.”
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