The Building Tradesman Newspaper

Friday, July 27, 2018

Good, bad and ugly ideas related to pension reform

By The Building Tradesman

WASHINGTON - A congressional committee is working on reforms to the multi-pronged crises and issues affecting the nation's multiemployer pension plans. A number of those pension plans are not in good financial condition, and the federal government's backstop for failing pension plans is itself in dire straits and will be insolvent in a few years given current funding levels.

What to do about it? Finding a solution isn't easy, and it will be painful and expensive: under current projections, about 10 percent of the 10 million people participating in multiemployer pension plans won't receive the full benefits they were promised. 

What not to do about it? That's easy, according to Segal Consulting, a benefits and human resources consulting firm retained by the union-affiliated National Coordinating Committee for  Multiemployer  Plans. In recent weeks Segal issued several cautions that solutions being suggested in Congress to address the funding gap for multiemployer plans "would be unreasonable and inappropriate," "could destabilize the system," and could potentially "be devastating to the vast majority of
multiemployer pension plans that are financially stable."

Segal was commenting on comments made during two public hearings this year during the House Joint Select Committee for the Solvency of Multiemployer Pension Plans. Without diving too deeply into actuarial and accounting terms, one primary suggestion at the public hearings called for more conservative assumptions on the levels of investment return earned by multiemployer plans. It apparently matters a great deal if a plan assumes it will earn 3.5 percent on its investments vs. 7 percent.

"One possible measure that appears to be gaining traction among some Committee members is to require multiemployer plans to use more conservative rates and actuarial assumptions similar to those currently required underfunding rules for single-employer plans," Segal said in a June 21 letter to the committee. "As explained below, implementation of such a measure is not practical for multiemployer plans, would not help to prevent future crises, and would seriously harm plans that are currently financially sound and create a new and expanded retirement crisis."

Segal said current investment return assumptions by multiemployer plans are in the 7 percent range - it's too high, some have said, and "some even believe the assumptions contributed to the current multiemployer solvency crisis," Segal said. But the consultant said in fact investment returns have "consistently exceeded" 7.5 percent on a rolling 30-year basis. 

Lowering those investment-earning assumptions (to a suggested range of 3 percent) would trigger greater contributions by individual pension participants and employers - bad idea, Segal said.

"Many participating employers would not be able to afford significantly higher contributions," Segal said, "which would drive them to withdraw from the plans in which they participate. In some cases, financially weak employers may be forced into bankruptcy. If new, unreasonable funding standards precipitate employer withdrawals, contribution bases will be significantly weakened. Many otherwise-healthy plans could be pushed toward insolvency."

For individual workers, hourly pension contributions would have to double in order to help make up for the accounting shortfall.

A July 6 letter from the union-affiliated National Coordinating  Committee for Multiemployer  Plans to the Joint Select Committee was blunt. They cited a still-valid earlier letter they wrote in which "we indicated that this change would cause severe repercussions, including the collapse of the entire multiemployer system, the bankruptcy  or  liquidation  of many contributing  employers, the loss of much  of  the  federal  tax revenue attributed from multiemployer  pensions  and  wages  ($158.5  billion  in  2015), and  consequences for the national economy."

Segal said currently, about 130 multiemployer pension plans are projected to become insolvent within 20 years, with many plans running out of money within the next 10 years. Building trades plans are in better shape than most. A federal bailout of the multiemployer pension system - which no one expects - would cost U.S. taxpayers more than $100 billion, according to the Committee for the Responsible Federal Budget.

One of the newest plans to fix to the system could come in the form of federal loans, and it was introduced by Joint Select Committee Co-Chair Sen. Sherrod Brown (D-OH) and Ways and Means Ranking Member Richard Neal (D-MA), who also sits on the Joint Select Committee. According to the Committee for the Responsible Federal Budget, "the plan would create a new agency within the Treasury Department that would provide 'critical and declining' or already-insolvent multiemployer plans with low-interest 30-year loans large enough to enable them to pay full benefits. Multiemployer plans would make annual interest payments but would not need to repay the principal until the 30th year of the loan, at which point Treasury would be required to revise repayment terms and potentially forgive the loans of any plans otherwise unable to pay full benefits. The bill prohibits plans from making any reduction in accrued pension benefits and does not require any contributions from employers, putting the risk and burden entirely on taxpayers."

The bill would also fund a program at the Pension Benefit Guaranty Corp. to finance any remaining needs of pension plans borrowing from the new program. "Any money needed for the PBGC would be a tiny fraction of what it would otherwise be on the hook for if Congress fails to act," said an analysis by the office Sen. Brown.

Other potential solutions would allow the severely under-funded Pension Benefit Guaranty Corp. - which backstops failing pension plans - to raise premiums, reducing PBGC's maximum benefit guarantee, or require employers to increase plan contributions or restrict plans' ability to make risky investments. 

One reform has already been initiated: failing plans, in certain dire circumstances, can reduce benefits for workers.