The House of Representatives has passed a bill to address the funding crisis in some of the nation's largest multiemployer pension plans, and two committees in the Senate have introduced their proposed rescue bills. Unfortunately, neither plan may work. The House plan seeks to avoid cuts to benefits or increased costs for unions and employers, while the Senate plan seeks to place most of the burden on those groups while sparing taxpayers. Those are the areas where compromise is necessary.
The House bill, known as the Butch Lewis Act, would create the Pension Rehabilitation Administration and a related trust fund within the Treasury Department to make loans to financially troubled multiemployer plans.
The PRA is authorized to issue bonds through the Treasury to finance the loans. The loans would be for 30 years and would be used to fund the payment of benefits to retirees and participants as of the time the loan is made.
The plans that receive loans must fund the benefits by purchasing commercial annuity contracts from insurance companies with credit ratings of at least A from nationally recognized rating organizations; or by a cash-matching or duration-matching portfolio of investment-grade bonds; or by some other portfolio prescribed by the secretary of the Treasury that is equally protective of the participants' and beneficiaries' interests.
The House bill avoids any benefit cuts for employees and retirees and does not increase PBGC premiums. The hope is that, with the current liabilities paid out from the loans, the plans would become healthy from the investment returns and employer contributions over the life of the loans, and that they will be able to repay them in the 30th year.
Critics fear the House plan will fail to solve the crisis of the severely underfunded plans and that the burden will ultimately fall on the taxpayers.
The Senate bill, the Multiemployer Pension Recapitalization and Reform Plan, takes a different tack. It is designed to shore up the PBGC and place the burden of rescuing the troubled plans on participants, retirees and plan sponsors. The PBGC would gain authority and resources to allow more struggling plans to spin off some liabilities to the agency.
Multiemployer benefits guaranteed by the PBGC would increase, but plan sponsors would see increased premiums that would rise to $80 per participant from $20, and a new variable premium would be imposed on underfunded plans.
Plan sponsors would also face new rules for measuring liabilities and funding levels, and to keep companies from withdrawing, they would face new rules on withdrawal liabilities.
The competing legislative plans seek to prevent the collapse of at least 130 troubled multiemployer plans and the possibility that the PBGC's multiemployer fund will become insolvent by 2025.
Different actuarial consultants favor different solutions, but they also see plenty room for compromise. The Segal Co. argues it is in everyone's interest — workers, retirees, beneficiaries, employers and taxpayers — to find a solution to the multiemployer pension solvency crisis.
It wrote in a recent report: "The components of a comprehensive solution exist already: Establish a federal program to provide financial assistance to troubled plans, such as a federally guaranteed loan program providing direct financial assistance, or indirectly through PBGC-facilitated partitions or some other system that achieves this objective.
"The program should be designed to allow troubled plans time to resolve their problems.
"Avoid undue cost and financial burdens to healthy plans by keeping PBGC premiums at a reasonable level. ... Recognize the solution is complex and do not be lulled into a false comfort level with simplistic ideas, such as solely focusing on funding rules."
On the other hand, the Pension Analytics Group, which describes itself as a group of experienced economists and actuaries, "deeply concerned about the large number of multiemployer pension plans and public pension plans that have dangerously low funding levels," has presented a plan similar to the Senate plan.
Based on a multiemployer pension plan simulation model it developed, the group projected that about 200 multiemployer plans covering 3 million participants will become insolvent over the next 30 years. The model, in 500 trials, suggested that a loan plan similar to that passed by the House would reduce the number of beneficiaries affected by insolvencies by only about 1 million, leaving about 2 million unprotected.
The group's solution proposes that if a plan is within 15 years of becoming insolvent it should be required to cut the benefits to the PBGC level.
Second, as the Senate bill proposes, the per-participant annual PBGC premium should be boosted to $80. The group's report commented that: "We do not believe that this increase will be a significant burden on plans because it is small relative to the total cost faced by employers who participate in the multiemployer system."
Like the Senate, the Pension Analytics Group proposed a variable-rate premium for underfunded plans.
Somewhere in the middle of these proposals lies a plan to help multiemployer plans survive, preferably without taxpayer money or raiding the now-healthy PBGC single-employer plan, which has been mentioned as a possibility.
It is time for the House and Senate to get together and try harder to find that solution. The time to save the PBGC's multiemployer program, and many financially troubled plans affecting some 3 million U.S. workers and retirees, is short.