PBGC eyes little-used tool for plan insolvencies

PBGC management hopes to take greater advantage of a little-used tool for restructuring multiemployer pension plans, as the number of candidates likely to seek the agency's help grows.

Known as partitioning, the process allows multiemployer plans to isolate a group of participants from a troubled employer and have the Pension Benefit Guaranty Corp. provide financial assistance to them, while protecting the benefits of the remaining participants.

Agency officials also hope the process will lead to more mergers among multiemployer plans by making merger candidates healthier and more attractive. Having more plans consolidate could also reduce the number seeking PBGC assistance.

“It could be a very important part of how we manage the multiemployer wave of insolvencies that is coming,” said Sanford Rich, the PBGC's chief of negotiations and restructuring in Washington.

At the top of the list of insolvent multiemployer plans are those involving Hostess Brands Inc., Irving, Texas, the company that made the Twinkie famous. Hostess, which liquidated in 2012 and sold its snack cake business to Apollo Global Management and Metropoulos & Co. in 2013, had already suspended payments to its 42 multiemployer plans in 2011.

Dusting off a tactic last used in 2010, the PBGC announced Jan. 31 the partition of Hostess participants from the $23.3 million Bakery and Sales Drivers Local 33 Industry Pension Fund, Baltimore. The plan's funding level had plummeted to 50%, largely due to Hostess suspending contributions.

The agency also coordinated the merger of the now-healthier and, thanks to partition, fully funded Local 33 pension fund with the Milk Drivers and Dairy Employees Local Union 246 of Washington D.C. Pension Fund, Landover, Md. In 2012, that plan had $64.2 million in assets and was 101% funded.

Both pension funds cover members of the International Brotherhood of Teamsters, some of whom worked for Hostess.

Teamsters General Counsel Brad Raymond said in a statement that while the union would prefer not to have the Hostess participants' benefits cut by an average of 17% to get to PBGC levels, “at least these benefits will now be guaranteed and PBGC's actions will ensure that the fund will not run out of money.”

Another multiemployer pension fund with Hostess participants already has applied for partition relief, and more are expected, Mr. Rich said.

“Overall, we think what PBGC is doing offers the best chance for struggling pension funds to survive in the context of inadequate bankruptcy laws, which permit companies to abandon their responsibilities and shift their pension commitments to PBGC, other responsible employers and their workers,” Mr. Raymond said in a statement.

The last time PBGC officials tried partitioning was in 2010, for the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund. After 52 contributing employers went bankrupt or out of business, the plan administrator applied for partition. The plan, once expected to be insolvent within three years, stayed solvent with 57 contributing employers and full benefits for workers. Some 1,500 people from the bankrupt firms went into a new plan with benefits paid by the PBGC and capped at $12,870 a year for 30 years of service.

Plan supervisor Linda Femmer said the move, along with recent investment gains, has kept the plan solvent.

For now, the PBGC's own financial woes prevent it from more aggressively using partitioning.

In its most recent annual report as of Sept. 30, the agency's multiemployer program deficit increased to $8.3 billion from $5.3 billion the year before, and up from $2.8 billion in fiscal 2011.

But faced with the prospect of more multiemployer plan insolvencies, PBGC officials say they cannot just sit and wait for more plans to land on their doorstep.

Successful use of the partition tool could also help PBGC officials make their case to Congress to let the agency raise its multiemployer premiums; they hope to overcome a political roadblock by showing the efficacy of partitioning.

“If we had more resources, we could do this more broadly to help struggling multiemployer plans,” Mr. Rich said.

Multiemployer plan advocates like the idea of the PBGC playing a more active role earlier in sorting out plans with a troubled cohort, like the Hostess groups, although they would like to see safeguards over who gets put in that category, and how the sacrifices are shared among participants.

Even with large multiemployer plans, which under current law are required to keep spending money until it is gone, “partition could help,” said one multiemployer expert who declined to be identified. “PBGC said they can get those plans back on track. I think it can work for any plan. There's always some threshold that could make it work.”

More cash to spend on portioning troubled plans would also help PBGC officials pursue the related goal of encouraging more mergers, by getting merger candidates in better shape through partitioning. Mergers are particularly helpful for multiemployer plans in that they reduce administrative costs and increase assets, which also allows for more sophisticated asset allocation strategies, experts say.

PBGC officials are also hoping that this latest example will convince members of Congress to give them more legal leeway to do more partitions. Currently, the Employee Retirement Income Security Act criteria for partition include having a significant number of contributing employers that filed for bankruptcy, the likelihood of insolvency in the near future and the potential to reduce risk of plan insolvency. Another criterion is whether contributions would have to be dramatically increased.

Being able to meet all those criteria in the Local 33 case “is why Hostess pops out,” Mr. Rich said. “It gives us the authority to partition liabilities for which there is no contributing entity.”

PBGC officials are now devoting more time and resources to identifying candidates for partition, and to let multiemployer plan trustees and administrators understand the options available to them. In cases where the pension funds are not interested in asking for partition, the PBGC can step in and ask a court to order it, but it is a time-consuming process. n