A recent letter to the editor in Pensions & Investments ("Debunking the myths of a loan program for struggling multiemployer plans," March 18, 2019) attempts to defend the Rehabilitation for Multiemployer Pensions Act, proposed legislation that would provide low-cost federal loans to struggling multiemployer plans. In the process, the letter contends that the recent quantitative analysis of RMPA performed by our organization, the Pension Analytics Group, was flawed, and indirectly implies that we are at the service of special interest groups seeking to derail the legislation.
We wish to set the record straight regarding both our modeling of the potential effects of RMPA and our organization.
The Pension Analytics Group is composed of independent economists and actuaries who are deeply concerned about the large number of multiemployer plans that have dangerously low funding levels. The sense of concern our members and affiliates possess regarding this issue reflects our lengthy careers in the service of the U.S. private pension system and of its backstop, the Pension Benefit Guaranty Corp. Our goal is to accelerate discussions of funding solutions by providing robust and timely data-based simulations of policy options.
We are not affiliated with any political groups, and our group has a diverse set of political views. Although we are not established as a not-for-profit organization, we have, to date, accepted no payments for our analyses of the multiemployer pension system. Rather, we have operated on a volunteer basis.
To assess the magnitude of the multiemployer funding problem, and to test proposed solutions, we created a simulation model of the multiemployer system, which we refer to as MEPSIM. We have used MEPSIM to produce a series of papers, which are available on our website. In addition, MEPSIM itself is available on the website — users can download the model for free and run their own simulations.
With respect to our analysis of RMPA, the March 18 letter to the editor contains several factual errors. First, it indicates that, in November 2018, we released a paper analyzing RMPA. Our November paper, in fact, provides an analysis of a generic loan program, not specifically of RMPA.
Second, the letter states that our analysis "fails to factor in the concept of defeasement, a linchpin of the federal loan program." Yet, our analysis of RMPA — released in February 2019 (pensionanalytics.org/our_papers) — specifically modeled the Butch Lewis Act, which the letter indicates is equivalent to RMPA. Under the Butch Lewis Act, plans are required to invest the cash from loans in low-risk portfolios that will finance the liabilities of plan participants in pay status at the time the loan is implemented. This approach of matching assets to liabilities is sometimes referred to as "defeasement" or "immunization."
Based on extensive stochastic simulations using MEPSIM, we conclude that defeasement will not be effective at either preventing loan defaults or preventing plan insolvencies. Even if a defeasement strategy is employed, a low-cost loan will not magically change the downward trajectory of a struggling pension plan that is headed rapidly toward insolvency. A loan buys the plan more time, but more time is not helpful for a plan whose funding situation is deteriorating. A loan is not free money. It is a debt that must be repaid. A plan that has a billion-dollar deficit before receiving a loan will have the same billion-dollar deficit after receiving the loan. Our simulations indicate that, in this situation, it is highly likely that the plan will both default on the loan and go insolvent.
Third, the letter indicates that "the Pension Analytics analysis fails to recognize the numerous mechanisms in the legislation that greatly reduce the likelihood of loan defaults." In our February research paper, we openly acknowledge that we did not model those features of RMPA that would make loan default nearly impossible. For example, in our simulations, we did not permit plans to simultaneously receive both a loan and PBGC assistance, and we did not permit plans to roll over their debt in the event they are unable to make the required payments of interest and principal on their original federal loan.
Such policy features would reduce the loan program to the equivalent of a "revolving credit" system, which we fear will be perceived by the public as little more than a cash giveaway. And in the end, even this open-ended line of credit would fail to prevent the eventual insolvency of many of the zone D plans.
Our group does not propagate "myths." We arrive at conclusions after carefully reviewing data and simulation results. Based on extensive stochastic modeling, not only of RMPA but also of additional options for low-cost loans, we do not believe that weak multiemployer plans can be saved via a loan program. The costs to the plans and to the participants are only postponed. The proposal provides partial mitigation that helps some pensioners over the near term, but it is not a cure.
To prevent bankruptcy of some multiemployer plans and of the multiemployer insurance fund at the PBGC, without resorting to a government bailout, the options are a mix of deep benefit cuts, contribution increases and PBGC premium increases. With respect to benefit cuts, the Multiemployer Pension Reform Act of 2014 in our opinion is too restrictive. The act should be amended such that struggling plans have greater freedom to implement benefits cuts needed to reduce massive funding deficits.
In the longer run, to ensure the stability of those multiemployer plans not in immediate jeopardy, there is a need for a careful appraisal of how legislative provisions may have led to continuing large gaps in the funding ratios of U.S. private plans between the single-employer and multiemployer sectors.
High-risk multiemployer plans are faced with very low funding ratios, high ratios of retirees to actives, and, in some cases, declining industries that have weakened the employers associated with the plans.
No quick fix by legislative sleight-of-hand is possible.
Barring the aforementioned bona-fide changes to the cash flows and liabilities of the plans, and/or the resources of their insurance backstop, loans just push a very large, looming problem further down the road.
The writers — Theodore Goodman, lead actuarial modeler; Emily Andrews, economist; and John Turner, economist — are members of the Pension Analytics Group.
