PBGC looking to partitions for relief

The first approval for multiemployer pension fund benefit cuts with partitioning is raising hopes at the Pension Benefit Guaranty Corp. that more plans can be helped before landing on the agency's doorstep.

On July 21, the United Furniture Workers Pension Fund A, Nashville, Tenn., won approval from the Treasury Department for a rescue plan submitted under the Kline-Miller Multiemployer Pension Reform Act of 2014. The rescue plan, which called for benefit reductions and partitioning — setting up a second plan to pay some benefits that the PBGC guarantees — aims to avoid insolvency projected for 2021.

Both steps were necessary for the plan to win Treasury approval, which is only granted if the changes will make a pension fund solvent for at least 30 years. Taken together, PBGC officials said, benefit cuts and partitioning keep the United Furniture Workers' pension fund solvent in the near term and improve the odds that the plan will remain so and pay benefits over the long term.

"Partitions are a powerful tool that trustees of 'critical and declining' plans should consider," said Eli Greenblum, chief actuary of the Segal Group in Washington,

While the PBGC had some authority before the MPRA to facilitate partitions, it was rarely used. One big difference now is that struggling plans must cut benefits first, by enough to keep the plan solvent. By codifying that and other criteria, "MPRA really changed the way partition worked," said a PBGC official who declined to be identified.

When the United Furniture Workers Pension Fund applied in January for the two-step process, the plan was 27% funded, with assets of $51.3 million and liabilities of $189 million. With the combination of partitioning and benefit reductions known as suspensions, those liabilities are projected to drop by $108 million, and stay around $80 million for the ​ foreseeable future.

Under the plan, about 30%, or roughly 3,000 people, are seeing an average 12.7% reduction in their monthly benefit that began Sept. 1. Seventy percent of both plans' participants will not be affected.

It was the second approval under MPRA and the first to include a partition, which calls for the PBGC to provide financial assistance for a new successor pension plan that will be overseen by the legacy pension fund's trustees.

The new partition plan will pay benefits for terminated vested participants and 56% of the retirees. The remaining retirees and active participants will remain in the original, now better-funded plan.

The agency is struggling with its own financial crisis, with a multiemployer insurance program that is projected to be insolvent by 2025. That doesn't give it a lot of resources, but facilitating partitions can help both the PBGC and smaller plans that are more likely to meet the criteria.

One of the most important requirements for a partition is that it will not impair the agency's ability to help other plans. Plans' cash flow and other assumptions also have to pass muster to avoid adding to the agency's long-term losses.

Partitioning is more equitable now, said the PBGC official, because all plan participants have to take cuts to reduce liabilities before the second plan is created. While trustees and PBGC officials have administrative tasks for both plans, "it is almost invisible to participants," he said.

While acknowledging the difficult choice for participants, partitions are desirable because "they are not coming back to the PBGC" for a much larger share of assistance that could worsen its deficit, said another official privately.

Eager to see if partitioning can help more plans, PBGC officials are now engaging in early negotiations with more potential MPRA application candidates. They expect to do 12 to 18 partitions over the next three years, as fewer MPRA candidates can avoid insolvency with benefit cuts alone, the PBGC official said.

"The PBGC has limited resources, but has demonstrated willingness to provide sponsors with feedback to partition candidates," said Mr. Greenblum of Segal.

"Plans are thinking about it in a much more concrete way. That has increased the number of plans consulting with us," said the PBGC official, who estimates that roughly 10% of the 100-plus plans already deemed critical and declining, and therefore eligible to apply under the MPRA, will meet the criteria for plan partitioning as well.

Partitioning is most likely to help smaller plans that have reasonable prospects for remaining solvent, industry experts said.

"I think it is going to depend on the size of the benefits. If the cuts are substantial, the plan may not need the partition," said Christian Benjaminson, principal consulting actuary with Cheiron Inc. in McLean, Va., who prepared the furniture workers' MPRA application.

Another factor is whether participants vote to accept their fund's MPRA plan. Approval was not an issue for the United Furniture Workers fund, since 70% of participants had already-low benefits that could not be cut beyond 110% of the PBGC's minimum guarantee. The current PBGC multiemployer guarantee maximum, in place since 2001, is $15,015 per year for a worker with 35 years of service, and $8,580 for 20 years of service.

Mr. Greenblum noted that winning approval from participants to undertake a partition "will depend on many variables, including the extent of communications efforts made by the trustees and the efforts of groups organized in opposition, including the position of the parent union," said Mr. Greenblum.