An analysis of the Pension Benefit Guarantee Corporation's deficit and scenarios in determining adequate premiums to cover claim experience

Abstract

This article examines Pension Benefit Guarantee Corporation (PBGC) premium development, claims experience and the PBGC's net financial position to determine the credibility of premiums charged for coverage from 1994 to 2010. A retrospective premium model is presented that analyzes variations in flat and variable rate premiums as exogenous factors in accumulating PBGC's net financial position. The retrospective model considers a US$35 flat premium per participant, doubling the variable rate, or increasing the flat premium to $50 over the study period. A $35 flat premium would have been insufficient to meet historical losses from 1994 to 2010. A combination $35 premium, plus a doubling of variable revenues would have been modestly adequate producing a $791 million deficit in 2010. However, a $50 flat premium produces adequate development of the PBGC fund resulting in a $2.1 billion surplus by 2010. The findings of this study provide evidence that current PBGC premiums appear inadequate for meeting future claims based on historical experience from 1994 to 2010. However, a combination of flat and variable rate increases that reflect the true cost of coverage based on PBGC's incurred losses may move PGBC towards an adequate rate structure. © 2012 Macmillan Publishers Ltd.