The variable-rate premium is a special type of insurance premium that certain pension plans must pay to the Pension Benefit Guaranty Corporation (PBGC). It is designed to help protect retirees by providing extra funding for plans that may not have enough money to cover promised benefits.
Variable-rate premiums apply specifically to underfunded single-employer defined benefit pension plans. These are retirement plans where an employer promises a specific monthly benefit to employees upon retirement, and the employer is responsible for funding the plan. When a plan doesn’t have enough assets to meet its obligations—meaning it’s underfunded—it must pay this additional premium on top of the standard flat-rate premium that all PBGC-insured plans pay.
How Variable-Rate Premiums Work
The amount of the variable-rate premium is calculated based on the plan’s unfunded vested benefits. In simple terms, unfunded vested benefits are the portion of promised retirement benefits that the plan cannot fully cover with its current assets.
Here’s an example:
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Imagine a company’s pension plan promises $10 million in benefits to employees.
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The plan currently has $7 million in assets.
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This leaves $3 million in unfunded vested benefits.
The variable-rate premium is a percentage of that $3 million, which the company must pay to PBGC. The exact rate is set by PBGC and may change from year to year.
This system encourages plan sponsors to properly fund their pensions. The more underfunded a plan is, the higher the variable-rate premium, creating a financial incentive for companies to maintain adequate funding.
Why It Matters
Variable-rate premiums are an important part of the pension safety net in the United States. PBGC is a federal agency that guarantees certain retirement benefits for private-sector employees. The combination of flat-rate and variable-rate premiums helps PBGC maintain the financial strength to pay benefits if a plan fails.
For employees and retirees, understanding variable-rate premiums can be reassuring. Even if a company’s plan is underfunded, these premiums contribute to a system designed to protect their earned benefits.
Real-Life Scenario
Consider a company that is struggling financially. Its pension plan is slightly underfunded, with unfunded vested benefits of $500,000. The company must pay both the flat-rate premium and the variable-rate premium. This means:
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Flat-rate premium: $100 per participant
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Variable-rate premium: $79 per $1,000 of unfunded vested benefits
If the plan has 50 participants, the flat-rate premium totals $5,000, and the variable-rate premium would be $39,500 ($79 × 500). This illustrates how the variable-rate premium grows with the size of the funding shortfall.
Key Takeaways
Variable-rate premiums are an additional charge for underfunded single-employer defined benefit pension plans. They:
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Are calculated based on unfunded vested benefits.
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Work alongside flat-rate premiums paid by all PBGC-insured plans.
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Encourage employers to keep their pension plans adequately funded.
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Support PBGC’s mission to protect retirees’ benefits in the event of plan failure.
By understanding variable-rate premiums, employees and plan sponsors can better appreciate how the pension insurance system works and why proper plan funding is essential.
Related keywords: what is variable-rate premium, PBGC insurance, pension funding shortfall, defined benefit plan premiums, retiree benefit protection
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