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Moody’s Moody About PBGC Sustainability

Pension plan sponsors have long been concerned about rising PBGC premiums — but now a major ratings agency has raised its concerns as well.

Following the recent announcement by the Pension Benefit Guaranty Corporation (PBGC) that its multiemployer pension insurance fund deficit had surged by $10 billion to $52 billion as of the fiscal year ended Sept. 30, last week credit ratings agency Moody’s described the situation as “credit negative” for participating employers. “Given the size of the deficit, such premiums will almost inevitably go up, quite possibly to unaffordable amounts, which will be credit negative for sponsoring companies,” Moody’s said.

PBGC premiums have increased 340% over the previous eight years, according to Moody’s, which noted that, “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,” according to the report. The report notes that these premiums reduce plan sponsors’ annual free cash flow by more than $270 million.

The PBGC's fiscal year 2014 projection report released in September predicted the multiemployer pension plan program would run out of money in 2025, while the single-employer program projections showed improvement, with solvency for the next 10 years. The PBGC reported a $24.1 billion deficit in its single-employer program.

Even with those premium increases, Moody's said, “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.

The report did cite what it viewed as positive news for plan sponsors in the Multiemployer Pension Reform Act of 2014 (MPRA), which established a new process for a multiemployer pension plan 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 multiemployer plan 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 multiemployer plans 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.