Trustees of struggling multiemployer pension funds have a narrow window of opportunity to do more than just cut benefits in order to survive, if they can take advantage of the Pension Benefit Guaranty Corp. partition program before the agency itself runs out of money, benefits experts said.
The Multiemployer Pension Reform Act of 2014, which allows deeply underfunded plans to reduce benefits to avoid insolvency, also expanded the PBGC's power to partition plans.
The old partition authority was limited to helping plans in bankruptcy, and affected participants saw their benefits cut to the PBGC levels for multiemployer plans, typically less than $13,000 a year for 30 years of service.
Under the new partition rules, the PBGC can take some of the benefit liabilities to help preserve the solvency of a plan projected to run out of money within 20 years. The program also allows plans to preserve benefit levels to 110% of PBGC-guaranteed amounts.
By one PBGC calculation, some 1.5 million participants are covered by multiemployer plans expected to become insolvent by 2035. Benefit reductions, also known as suspensions, could help preserve payments to 600,000 participants. Partitioning could keep payments above guaranteed minimums for 900,000 participants.
Overall, as many as 10% of 1,427 multiemployer defined benefit plans, with $431 billion in combined assets as of 2014, are likely to become insolvent, by PBGC and other estimates. “Most (of the 10%) are in plans that will require both suspension and partition,” said a PBGC official who declined to be identified.
The most likely candidates for partition are plans where benefit cuts alone won't be enough for the plan to survive. But a partition — a process that allows multiemployer plans to isolate a group of participants from a troubled employer and have the PBGC provide financial assistance to a new successor plan, while keeping the original plan intact — is considered a better option than dropping to the modest PBGC guarantee level in the event of a plan termination.
In those cases, the combination of benefit cuts with partition assistance “would be appealing,” said a multiemployer plan consultant who declined to be identified. “Clients are just starting to recognize it's a possibility. I think a lot of plans will find their way there, but it will take a while. Partition is not that obvious a choice,” he said.