With less than a week to produce a solution to a massive multiemployer pension underfunding problem, expectations of a special congressional committee are shifting from dramatic new ideas to some tough choices for plan sponsors.
An analysis of a draft proposal available as Pensions & Investments went to press shows the ideas being considered could help some of the 100-plus multiemployer plans in the most critical shape and shore up the finances of the Pension Benefit Guaranty Corp. However, it could also push currently healthy plans, which now number more than 1,200, into suddenly shakier condition and even prompt many to close their plans entirely. For some observers, it is an approach that protects retirees at the sake of active workers.
A source close to the process said negotiations are ongoing and that the document does not reflect a final agreement. Sherrod Brown, D-Ohio and select committee co-chairman, said in a statement that “the hardworking men and women who are counting on this committee deserve a solution, and Chairman Hatch and I continue to negotiate with other members of the committee to reach a bipartisan agreement.”
Members of the Joint Select Committee on Solvency of Multiemployer Pension Plans — 16 House and Senate members split evenly from both parties — have been at it since February, holding hearings and consulting with stakeholders, multiemployer pension experts, academics and PBGC officials, whose own multiemployer program hangs in the balance.
The draft proposal rejected the idea of a federal loan program, which did not gain political traction with the disparate group. Instead, it offers several measures to help struggling plans protect retiree benefits, including increasing the PBGC minimum guarantee level to $70 per month per year of service, and at least $3,000 per year.
It even undoes benefit cuts already authorized by the Treasury Department under the Multiemployer Pension Reform Act of 2014, but plans within five years of insolvency would cut to the minimum benefit level and then be terminated.
The PBGC would gain more authority and resources to take financial responsibility for struggling plans. The draft proposal calls for a 30-year promise of $3 billion in federal funding per year to allow it to do more partitioning, a new variable rate premium for plan sponsors, a new "stakeholder" premium to be paid by retirees in struggling plans and a new exit premium for employers.
In addition to those new premium costs, healthy plans would also be squeezed by a requirement to use a more conservative discount rate when measuring liabilities. While 7.5% is a typical rate used by plans today, the proposal calls for a cap of the long-term corporate bond rate plus 2%, roughly 100 basis points lower. Those two changes have some multiemployer plan experts warning that many healthy plans could suddenly become classified as endangered and force employers to consider getting out or trustees to think about shifting to defined contribution plans.
The PBGC multiemployer program, which is headed toward insolvency by the end of fiscal year 2025, recently saw its deficit drop to $53.9 billion from $65 billion the previous year. But the agency continues to brace for what PBGC Director W. Thomas Reeder Jr. said will be "a wave of insolvencies" beginning in 2020.
According to actuarial firm Cheiron Inc., the number of multiemployer pension plans declaring themselves likely to be insolvent within 20 years is now 121, with a collective $48.9 billion in underfunding, up from 114 plans in 2017. Cheiron found that three plans account for 65% of the total unfunded liability: the $16.1 billion Teamsters Central States, Southeast and Southwest Areas Pension Plan, Rosemont, Ill., with $22.9 billion in unfunded liabilities; the $4.4 billion Bakery and Confectionery Union and Industry International Pension Fund, Kensington, Md., with $3.85 billion in unfunded liabilities; and the $2.9 billion New England Teamsters and Trucking Industry Pension Fund, Burlington, Mass., with $5.1 billion in underfunding.
Select committee members and staff appreciate what is at stake, said Joshua Shapiro, senior actuarial adviser at Groom Law Group in Washington. "While it is impossible to know if a compromise can be found, they are taking this issue extremely seriously. There is no doubt that people want to get something done."
The committee has until Nov. 30 to produce a report with recommendations and proposed legislation that, if approved by at least five members from each party, is guaranteed an expedited vote before this session of Congress adjourns.
The centerpiece of the plan under discussion is giving the PBGC enough money to beef up its partition program, with the agency taking financial responsibility for a struggling plan's "orphans" — people who earned benefits working for employers no longer in the plan — while the plan itself keeps operating for the remaining employees.
So far, the cash-strapped PBGC has only been able to do one modest partitioning in recent years, for the $51.3 million United Furniture Workers Pension Fund, Nashville, Tenn., which in 2017 was 27% funded. The select committee's proposal is expected to include significantly more federal funding to help finance more partitions.
All of these ideas come with both supporters and detractors, including retirees galvanized since passage of MPRA in 2014 to oppose benefit reductions allowed through application to the Treasury Department. But there is a lot at stake if the struggling plans' slide into insolvency is not stopped. As many as 2 million people — not just those in struggling plans but anyone backed by the PBGC — could lose their benefits if the PBGC multiemployer program runs out of money, while a taxpayer bailout of the PBGC would costs billions, and many small businesses could be on the hook for underfunding if the PBGC cannot make up the difference.
At the same time, select committee members, especially those critical of multiemployer pension funds, want to be sure other, healthier multiemployer plans don't risk repeating the same problems, and that there is shared sacrifice.
That is understandable, said former PBGC Director Joshua Gotbaum, now a guest scholar at the Brookings Institution in Washington. "If Congress reaches a deal, it will do so by enabling the PBGC to do the job for which Congress created it — protecting the pensions of orphans. The trade-off has to be rules in place to ensure that this doesn't happen again."
While many multiemployer pension advocates held out hope that a federal loan program would be part of the equation, concerns over the chances of helping enough troubled plans and not doing enough to shore up the PBGC, mixed with perceptions of it as a government bailout, had dimmed its prospects.
The committee has some tough calls to make, said Charles Blahous, a senior research strategist at George Mason University's Mercatus Center. In addition to funding and withdrawal liability rule adjustments, the biggest change needed, Mr. Blahous said, is how multiemployer plans measure liabilities. He advocates for using rates no higher than those exhibited in a yield curve of corporate bond rates.
"The most important thing is to fix the measurement problem. What there should not be a debate about is whether to properly measure assets and liabilities. I think there is increased understanding of that," said Mr. Blahous.
While the discount rate plans use now to measure liabilities might be too high, "if you change the rules, you need to give plans time," said Mr. Gotbaum. He recalled a similar experience for single-employer plan sponsors during passage of the Pension Protection Act of 2006. The discount rate first was lowered to a long-term corporate bond rate, with a seven-year adjustment period that was repeatedly extended by Congress, ultimately to more than 20 years. The draft proposal offers a 30-year amortization period to absorb funding losses resulting from the lower discount rate.
Karen Friedman, executive vice president and policy director of the Pension Rights Center in Washington, said her retiree advocacy group is keeping a close eye on the committee to protect promised benefits to participants in multiemployer plans. "We hope that they are going to be able to reach a full and fair solution, not one that just protects plans and the PBGC. All we can do right now is hope."