House Letter on Proposals to Increase PBGC Premiums

Release Date:

Monday, April 4, 2011

April 4, 2011

RE: Proposals to Increase PBGC Premiums

Dear Chairmen Camp and Kline and Ranking Members Levin and Miller:

The undersigned organizations, representing employers who voluntarily provide retirement benefits to
millions of Americans, write to express our serious concern with the proposal to raise Pension Benefit
Guaranty Corporation (PBGC) premiums that is contained in the Administration’s 2012 Budget. Similar
proposals that would have also eliminated the public’s ability to engage in a policy dialogue with
Congress regarding the level of PBGC premiums have been suggested – and rejected – in the past.
Quite appropriately, Congress has resisted efforts to weaken its authority in this arena. Moreover,
changes of the type and magnitude proposed by the Administration would undermine the defined benefit
pension system, hinder the economic recovery and could create an ill-advised precedent of government
intrusion into normal business activities.

As we understand it, the Administration's proposal would grant the Executive Branch (through the
PBGC Board) the authority to set and adjust the level of premiums that a retirement plan sponsor would
pay. In setting those premiums, the PBGC Board would be required to take into account an employer’s
credit rating, despite serious questions that have been raised in recent years about the methodology used
in determining such ratings, and their reliability in certain circumstances. The President's budget
estimates the proposal would raise $16 billion over the next 10 years. The proposal would reflect almost
a 100% increase in PBGC premiums, all collected from companies that may or may not pose a risk of
transferring their liabilities to the PBGC. We question whether any workable proposal could be
constructed to raise additional PBGC premiums of that magnitude. But even a less aggressive premium
increase, when added on top of the multi-billion dollar PBGC premium increases that were enacted in
2006, could do irreparable harm to the defined benefit system. As we stated during the debate over the
2006 legislation, the best way to strengthen the PBGC is to keep more employers in the system, not to
tax them out of the system.

Proposals that base PBGC premiums on credit ratings would create the potential for a downward
corporate spiral that could be very harmful for American workers and the economy. Requiring massive
premium increases from companies that are already facing financial difficulties would add further stress
and could force affected employers to reduce their workforce or discontinue providing retirement
benefits altogether. Worse yet, for some employers, the increased cash flow burden associated with
sudden inflated contribution obligations could force unnecessary bankruptcies with devastating
consequences for workers and our economy. That is not in anyone’s interest, including the PBGC,
which could be forced to assume plan liabilities if the company does not recover.
In addition, a creditworthiness test would inevitably result in the PBGC becoming an entity that makes
formal pronouncements about the financial status of American businesses. This role for a government
agency would be inappropriate. Leaving aside the question of whether the PBGC can establish accurate
mechanisms for measuring and adjusting an employer's credit risk across industries and across the
country, even modest year-to-year changes in those government credit ratings could have implications
well beyond PBGC premiums, potentially affecting stock prices or the company's access to other credit
sources.

We also question the need for such drastic measures, rather than a carefully-crafted approach to
premium levels. The PBGC states in its 2010 annual report that “[s]ince our obligations are paid out
over decades, we have more than sufficient funds to pay benefits for the foreseeable future.” Since there
is no immediate crisis, Congress should not relinquish its authority to establish appropriate premium
requirements. Instead, Congress should take the time required to examine the PBGC’s financial
situation more carefully, including an in-depth review of the actual nature of PBGC’s deficit, which has
been questioned repeatedly.

We understand the pressures that the Committees are facing to address the budget deficits, but
significant increases in PBGC premiums must be carefully examined. Premium increases that, in effect,
increase a company's tax burden divert resources that could be better spent on plan funding and creating
jobs. It also would likely exacerbate the trend of employers moving away from offering pension plans.
Thank you for your prompt consideration of this critically important issue.

Sincerely,

American Benefits Council
Business Roundtable
Education Resources Information Center
Financial Executives International Committee on Benefits Finance
Financial Services Roundtable
Insured Retirement Institute
National Association of Manufacturers
Society of Human Resources Management
The ERISA Industry Committee
U.S. Chamber of Commerce

Cc:
Budget Committee Chairman Paul Ryan
Budget Committee Ranking Member Chris Van Hollen