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  2. DEFINED BENEFIT
February 09, 2015 12:00 AM

Multiemployer plans untangle reforms

Hazel Bradford
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    Diane Gleave said it will be 'very time consuming' to figure out what plans can do.

    Some multiemployer pension fund executives are trying to figure out whether to take advantage of a controversial new reform law that allows potential benefit cuts for participants and retirees. Others are hoping for further reforms to allow for alternative plan designs.

    The Multiemployer Pension Reform Act of 2014 — passed swiftly in December — allows deeply underfunded plans to take unprecedented steps to avoid insolvency but comes with strings attached. It also gives federal regulators some new tactics that could help save troubled multiemployer plans (Pensions & Investments, Dec. 22).

    “There has been lot of misunderstanding about it,” said Diane Gleave, New York regional manager for The Segal Co. “We are hearing from clients who are hearing from their participants. The answer is, for many of them, maybe it doesn't apply. It is case by case, depending on the specifics.” Figuring out what plans can do “is going to be very time consuming,” she said.

    Multiemployer advocates are also spending time pushing for further regulatory changes to pave the way for composite plan design, also known as variable or target benefits that change with investment performance or other factors, which could help both healthy and troubled plans. The Partnership for Multiemployer Retirement Security, a group of employer and labor trustees behind the reform package, was disappointed that the idea was cut for political expediency and is now back on Capitol Hill.

    “It is the last major portion (of reform) and it will ultimately provide better protection for all plans,” said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, which launched the partnership. “Some industries are very interested. We are hopeful that it will come up this year.”

    If it does, participant advocates — shocked by both the benefit cuts and the law's expedited passage — pledge to push for more participant protections. “We think those could all be strengthened,” said David Certner, AARP legislative counsel and legislative policy director for government affairs. They will also be closely watching how regulators implement the new law. “The whole process, we think, is very skewed,” said Mr. Certner.

    The new law removed some uncertainty for plan sponsors by making permanent the funding level “zones” — originally set to expire Dec. 31 — that allow troubled plans classified as either endangered or yellow zone (less than 80% funded) or critical red zone (typically under 65% funded) — to take specific corrective actions to improve their funded status. According to the Department of Labor, multiemployer plans cover one in four defined benefit participants and had $431 billion in combined assets as of 2014.

    Most controversial

    The most controversial change under the reform law is a new category for deeply troubled plans, “critical and declining,” or what many call “deep red.” It allows trustees to take the unprecedented step of reducing benefits, even for current retirees, after they have tried all other means and can prove the plan will be insolvent in 15 years without intervention or 20 years for plans with mostly inactive participants. Those cuts can be no lower than 110% of the Pension Benefit Guaranty Corp.'s guarantee. Disabled or older retirees have further protections.

    The benefit cuts, known as suspensions, require approval from the Treasury Department, which has up to 225 days to decide. The plan must show how cuts would affect all plan participants, a majority of whom must approve it. That vote can be overridden if a troubled plan's potential claims would cost the PBGC $1 billion or more.

    The most likely candidate to apply first for benefit cuts, observers say, is the $20.3 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill. whose fortunes fell with those of the trucking industry and is now roughly 33% funded. Noting its “extremely limited options” for avoiding insolvency within 10 to 15 years, the Center for Retirement Research at Boston College modeled how much difference benefit cuts might make for the plan's funded status. If Central States chooses benefit cuts of 30% allowed under the new law instead, the fund could remain solvent indefinitely and that would be better for participants. “You have pain either way,” said CRR Director Alicia Munnell. “The question is balancing the pain vs. benefits running out.”

    "Unduly pessimistic'

    In a broader study released in September, CRR analysts used a simple methodology based on Form 5500 data and possible corrective actions to attempt to project insolvency of the most troubled funds. It found 70 plans could be insolvent within 15 years, and another 30 within 19 years. Stressing the simplicity of the modeling, which looked at plans less than 80% funded with a majority of inactive participants, the modeling could be “unduly pessimistic,” said Ms. Munnell. “It's really to get the ball rolling and start the dialogue.”

    By PBGC and other estimates, as many as 10% of 1,427 multiemployer defined benefit plans are likely to become insolvent. Before the new law, that also meant a 90% chance of insolvency by 2025 for the PBGC's multiemployer program. That number will change based on how many plans use the new options, but the PBGC also got some immediate relief from the law, which doubled annual multiemployer premiums to $26 per participant.

    The PBGC estimates as many as 50 plans could use the benefit adjustment authority and remain solvent. But the law also encourages regulators to be more creative, with new authority to facilitate plan mergers or to make greater use of partitioning, where the agency covers “orphan” workers whose employers are no longer in the plan and leaves a now-healthier plan intact.

    While the PBGC has only used that tactic three times, Joshua Gotbaum, former PBGC director, said in an interview that he expects greater use for as many as 100 plans with modest benefit levels too close to the 110% floor to cut.

    Stan Goldfarb, senior consulting actuary and managing consultant of the Washington office of Horizon Actuarial Services LLC, thinks the assisted merger provision of the law could do even more. Designed to protect the PBGC's balance sheet, it allows the agency to offer financial incentives for stronger funds to absorb a weaker one, after benefit cuts and other steps are taken.

    “If we have a fund that's deep red, that's certainly one of the options we are going to look at. ... I am hopeful that it is going to be a material help” to dozens of funds, predominantly smaller ones, said Mr. Goldfarb, whose firm consults on 80 multiemployer funds.

    “Most of the plans that are in trouble are going to need to come to the PBGC” for some assistance, said Mr. Gotbaum. “There will be a lot of conversations.”

    Related Articles
    Congressional changes raise prospects for legislative action
    Multiemployer plans can cut benefits to stay solvent
    IRS to seek input on multiemployer suspensions
    PBGC study: Multiemployer benefit cuts will be deeper
    Employers must disclose pension derisking efforts to PBGC
    Milliman: Multiemployer pension funding ratios drop slightly in 2014
    Treasury Department preps regulations for implementing multiemployer law
    Central States unveils website for rescue plan to save underfunded pension plan
    IRS releases multiemployer benefit cut voting rules
    Central States Teamsters pension fund seeks permission to cut benefits
    Central States fund seeks permission to cut benefits
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