New Congress, but no clear path for multiemployer pension reform
Date Posted: February 22 2019
WASHINGTON - The next step(s) for multiemployer pension plan reform in Congress are as clear as mud.
But that doesn't mean that recent hearings perhaps haven't brought about some progress in creating a bipartisan, baseline understanding of the funding problems facing some multiemployer pension plans.
In the last Congress, the Joint Select Committee on the Solvency of Multiemployer Pension Plans started their work in the spring of 2018 and adjourned on Nov. 30, without coming up with a reform proposal. But pension reform will be taken up this year in the new Congress, and a general understanding that something must be done could be the key to coming up with a viable long-term funding fix for multiemployer pension plans.Or not.
"In a deviation from recent Congressional practice, lawmakers from both sides of the aisle engaged in serious and substantive negotiations in a genuine effort to find a practical bipartisan solution," wrote Josh Shapiro, senior actuarial advisor, for the Groom Law Group, in an article for the Winter 2019 Association of Union Constructors' The Construction User. "Despite not producing a formal proposal, the committee’s work was not necessarily in vain, as the framework that it developed could very well serve as a blueprint for a comprehensive solution to the impending crisis facing the multiemployer pension system and future reform initiatives."John Tesija, an attorney for a dozen Michigan-based funds, said he remains doubtful that Congress can come up with a solution - "because Congress rarely does anything. It's going to take a lot of money, and God knows where the money is going to come from."
The multiemployer pension funding problem is deeply rooted in the U.S. economy and there isn't a one-size-fits all financial solution for the 24,000 plans and 40 million Americans who are covered by them. In November, an annual survey of plan data for all multiemployer plans found the number of plans declaring themselves likely to be insolvent within 20 years grew to 121 with a collective $48.9 billion in under-funding, up from 114 plans/$36.4 billion, in 2017. The federal Pension Benefit Guaranty Corp. (PBGC) is supposed to support failed pension plans, but is woefully underfunded.
PBGC Director W. Thomas Reeder has warned that the multiemployer backstop program “remains in deep deficit” and is projected to run out of funds within the next several years. “The challenges we face in the multiemployer program are increasing as the date of the program’s insolvency grows closer,” Reeder wrote in the PBGC’s 2018 annual report. “As more time passes, the changes required to prevent insolvency become more disruptive and painful for participants, plans and employers.”
There are multiple schemes with varying degrees of impact that are being floated to provide relief. But administrators of a number of healthy building trades plans have no intention of seeing their pension funds subject to added rules that might help severely ailing funds, while burdening their own.
"Most multiemployer plans, over 60 percent, are stable and in the 'green zone,'" wrote IBEW President Lonnis Stephenson in a letter written last year to leaders of the congressional committee overseeing the pension funding debate. "These proposals would pose new problems for green zone plans and exacerbate the issues that a small number of plans are currently facing."
One solution that's being floated that Stephenson said the IBEW can get behind is perhaps the least complex: creation of a new government agency to sell low-interest bonds that would help keep severely troubled plans afloat, essentially giving the funds loans and time to pay back the agency while not cutting benefits for recipients. Pushing this plan is the International Brotherhood of Teamsters - whose Central States plan has $22.9 billion in unfunded liabilities, easily the most critical plan in the nation.
Other proposed financial fixes are less popular with healthier funds. Among them are increasing PBGC premiums, which would help more retirees in weaker plans from seeing their benefits cut, but would place a greater financial burden on green zone plans (those that are over 80 percent funded).
Other proposed fixes and the overall situation is described below by Groom Law's Shapiro, sometimes described in some terms that only an fund actuary could love (or fully understand):
"Providing assistance to failing plans will cost money, and healthy plans are likely to end up paying some of the bill . Additionally, Congress will want assurances that the multiemployer system will not face another crisis in the future, which could mean significant changes to the minimum funding rules.
"While the specific details of the reform provisions considered by the (Congressional) Committee remain closely guarded secrets, the general framework consisted of three primary components.
*First, an expansion of the Pension Benefit Guaranty Corp.'s existing partition authority would provide relief to failing plans.
*Second, an increase in PBGC premiums coupled with direct Treasury funding would produce the cash flow necessary to support the partitioned liabilities.
*And lastly, higher minimum contribution requirements would be designed to protect the multiemployer system from future crises.
"The Committee considered expanding PBGC’s ability to take over a portion of the liabilities of distressed plans through its partition program as the primary mechanism for improving plans’ funding strength. The partitioned liabilities would become obligations of the PBGC, leaving plans with liabilities equal to what their employers can reasonably support.
"The Committee also considered raising the guaranteed benefit level and allowing PBGC to take over plans before they reach the point of insolvency. In order to address PBGC’s existing $54 billion short-fall , and support partitions for failing plans, the Committee considered both direct support from the U.S. Treasury and several new premium structures. Of greatest concern to healthy plans is the suggestion that a new variable rate premium could be introduced for multiemployer plans. Under this provision, plans would pay a premium each year that is equal to a percentage of their unfunded liabilities. Even well-funded plans could have large variable rate premiums, since the liability calculations would likely be done using very conservative actuarial assumptions.
"The Committee also considered the possibility of new premiums that are paid by the unions representing covered workers and the companies employing those workers, as well as premiums that are deducted from retiree benefit payments from across the entire system.
"The Committee also focused on strengthening the multiemployer pension system so that additional funding crises do not occur in the future. The centerpiece of the Committee’s thinking on this issue was a cap on the discount rate that actuaries use to calculate the funding requirements. This provision would result in a combination of higher contribution levels and lower rates of benefit accrual. The magnitude of the impact would depend on the specific provision that is adopted. On one end of the spectrum, a relatively high cap on the discount rate that only applies to future benefit accruals would have a modest impact on plans."
Tesija said the "partition" aspect of the proposals is akin to a surgical procedure of cutting off a diseased limb. Plans that are severely underfunded would partition legacy retirees into getting pension payments under the PBGC, while new and prospective retirees would be placed into a new plan.
Of course, that raises the question of where the PBGC would get such a new infusion of money. Higher premiums on existing plans? Greater contributions from employers/benefit recipients? The American taxpayer?
"It's just a tremendous amount of money we're talking about to shore up the system," Tesija said. "Where will it come from? No one knows how this is going to work out. But there's going to be pain - it will probably be spread around, but this isn't going to be easy."