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Loan programs seen as viable answer to multiemployer woes

Alicia Munnell believes any proposal will be better than the alternative of multiemployer plan participants losing their benefits because assets have dried up.

The dire straits faced by more than 100 struggling multiemployer pension funds are starting to draw attention in Congress, raising hopes that solutions, including a new federal loan program, are within reach.

Some of the attention comes from the Pension Benefit Guaranty Corp.'s own financial problems. Its multiemployer program is projected to run out of money by 2025 or sooner, putting at risk all the multiemployer pension benefits that it already guarantees.

The majority of multiemployer pension plans are well funded, with 65% funded at 80% or better, according to a survey by Segal Consulting. Yet as many as 114 multiemployer pension plans expect to become insolvent within the next 20 years, according to actuarial consulting firm Cheiron Inc. Those plans, with $44 billion in total assets, $80 billion in liabilities and 1.3 million participants, have declared themselves to be in "critical and declining" status, a category created by the Multiemployer Pension Reform Act of 2014 to alert regulators.

Three plans account for 63% of the underfunding: ​ the $15.3 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., the $4.3 billion Bakery & Confectionery Union and Industry International Pension Fund, Kensington, Md., and the $4.1 billion United Mine Workers of America 1974 Pension Plan, Washington.

The Center for Retirement Research at Boston College estimated that critical and declining plans are in the hole for $76 billion, based on current funding levels. When combined with plans in a second, critical category, typically less than 65% funded, it represents $187 billion in underfunding.

"These plans are not plans that can turn around on their own. They are going to use up all their assets and then stop paying benefits," said Alicia Munnell, the center's director. "Any kind of organized solution is better than the outcome when the money just stops paying out. These are people's lives. I think politicians don't want this to happen on their watch."

Kline-Miller 'solution'

The solution was supposed to come with passage of the Kline-Miller Multiemployer Pension Reform Act of 2014, which allows struggling plans to reduce benefits to avoid insolvency. So far, the Treasury Department has approved four applications out of 15 submitted, and denied five, including Central States.

That left an opening for several variations of a new federal loan program idea that has been incubating for several years at the International Brotherhood of Teamsters, United Parcel Service Inc. and the National Coordinating Committee for Multiemployer Plans, a Washington-based organization representing 1,400 multiemployer pension plans with more than $500 billion in combined assets.

The first pitch came in mid-November, when Senate and House Democrats proposed legislation based on the Teamsters' idea of a federal loan program without benefit cuts. Co-sponsored by Sen. Sherrod Brown, D-Ohio, and Rep. Richard Neal, D-Mass., the bill would create the Pension Rehabilitation Administration within the Treasury Department to oversee a loan program funded by the sale of a new class of Treasury-issued bonds to financial institutions. Eligible pension funds could borrow from the PRA at low interest rates for 30 years, paying only interest until the final year. Plans would have to certify that they could avoid insolvency and pay both benefits and interest during the loan term. They would have to put the loan proceeds in less risky investments that match liabilities, like bonds, or buy annuities.

For plans that need more financial help, the bill calls for more federal funding to the PBGC to help meet benefit obligations.

An actuarial analysis done for Central States found the Brown-Neal loan program alone would not be enough to avoid the insolvency projected to happen within eight years, but a loan and $20 billion or more in PBGC assistance would.

Help for all distressed plans

The bill could help all distressed plans, said Cheiron CEO Gene Kalwarski, whose firm modeled the cost impact of the Brown-Neal bill. "More than half would be helped without PBGC assistance, and it could even help already insolvent plans," he said.

It is also the best option politically, said John Murphy, Teamsters international vice president. "We think this is the only approach that has a realistic chance."

Bill supporters now hope that it could be attached to a must-pass omnibus spending bill Congress will soon take up.

"It has certainly gotten a lot of attention. Central States retirees are going to be extremely visible over the next couple of weeks. I do know that because of Central States, many more members of Congress are aware of the multiemployer crisis," said Mr. Murphy, who has heard interest from both Democrats and Republicans.

"If the U.S. government walks from (the PBGC's) financial obligation, that would certainly shake world markets," he said.

The NCCMP has its own loan program idea in the works, with three possible options.

One scenario calls for no benefit cuts and the federal government absorbing the cost of the loan program, while another option is having participating plans reduce benefits by 20% and having that money help to cover the cost of the credit program. A third scenario would have plans reduce benefits further to cover the entire cost of the program. Loans would be available to plans that can show they can achieve solvency and repay the loan using a conservative rate of return assumption.

A key difference from other loan program proposals, said NCCMP Executive Director Michael Scott, is that it is based on legal standards for other federal loan programs. "This program had to provide a realistic probability of repayment of the federal loan and be able to be implemented by the executive branch in a timely manner when passed," he said. A crucial point is requiring plans to use assumed rates of return of 5.5% or less when demonstrating solvency and their ability to repay the loans "because higher assumed rates would not be believable to Congress, Treasury or the Office of Management and Budget," said Mr. Scott.

Officials at UPS, which contributes to 25 multiemployer plans including nine plans where their share is 75% or more, have been working on a similar loan program proposal that could be blended into a final bill. The program would offer federal loans at 1% interest but also require pension funds to cut benefits by 20%, which the company said would make it politically viable.

'Protect the taxpayer'

"While we put together a solution, it's important to protect the taxpayer by resolving the pending funding crisis," said Chris Langan, UPS vice president of finance, in Atlanta.

"Developing a loan program that can be paid back is an important aspect moving forward," along with keeping troubled plans solvent without PBGC assistance. "The reality is, we can pay less now via a loan program or pay a heck of a lot more later, coupled with large benefit reductions when these plans and the PBGC go insolvent," he said.

"The stage is being set to solve this multiemployer problem once and for all. There are a lot of good ideas out there. The encouraging thing is that the right folks are talking about it and want to solve the problem," said Mr. Langan.

Former PBGC Director Joshua Gotbaum, now a senior fellow at the Brookings Institution in Washington, is more skeptical. "Unfortunately, what it's going to take now is either more money or more benefit cuts, or both," he said, adding that either choice is politically unpopular. He thinks Treasury should also revisit MPRA to let more plans help themselves.

Ms. Munnell of the Center for Retirement Research thinks that Congress is off to a good start. "I am pleased that the government is recognizing that it should help in some way. The loan approach seems like the easiest to sell.

"It's going to be a tough deal to get done, but if everybody's willing to give a little, I think it can be solved," she said.