"The proposal is both good government and better for business," according to Pension Benefit Guaranty Corporation (PBGC) Director Joshua Gotbaum. "It protects retirement security while encouraging and rewarding responsible business behavior."
I've been in the benefits and compensation consulting business for more than 25 years. I've counseled clients to implement defined benefit plans, redesign defined benefit plans, freeze defined benefit plans, and terminated defined benefit plans. I think this makes me an educated commentator on Director Gotbaum's quote. Yet, I don't get it.
The proposal coming out of the Obama Administration would allow the PBGC, in addition to its current structure of charging both fixed-rate and variable-rate (for plans that it views as underfunded) premiums, to charge premiums related to the financial health of the company. Now, tell me, how does this protect retirement security?
What it will do instead is convince more and more companies to freeze or terminate their defined benefit pension plans, thus reducing or eliminating their prospective premium obligations. This does not protect retirement security. What it actually does, instead, is destroy the pension promise that participants thought they had.
Take note: every time that the government makes the provision of pensions more cumbersome, fewer companies sponsor defined benefit plans. How can this possibly protect retirement security? What it does is protect the PBGC against its own questionable judgment. Time and again, the PBGC has pushed for changes in pension legislation until we got to the point that plan sponsors are required to fund long-term obligations on a short-term basis. Therefore, when assets or liabilities behave poorly, the plan is left 'underfunded' and owes the PBGC more money. Note that a plan that is significantly overfunded gets no relief in its flat-rate premiums. Further, under the vague proposal from the Administration, a plan sponsor of a very well funded plan who has a short-term financial downturn could owe extra premiums to the PBGC.
Tell me again: what does this have to do with protecting retirement security?