Long process predicted for multiemployer reforms

U.S. House committee approval of a multiemployer pension reform package seems likely to be only the first step in a process that will see many changes before a final plan emerges.

The House Ways and Means Committee approved a multiemployer pension reform package along party lines July 10 that centers on a federal loan program for struggling plans.

The bill's main sponsor, House Ways and Means Committee Chairman Richard E. Neal, D-Mass., predicted the full House would approve H.R. 397, also known as the Butch Lewis Act, by the end of the month. But Republicans on the committee disagreed, warning that it needed more work.

Mr. Neal has pledged to have a full House vote by the end of July. The legislation would create the Pension Rehabilitation Administration and a related trust fund within the Treasury Department to make loans to multiemployer plans in critical and declining funded status that are approved by Treasury to reduce benefits, or to plans that are already insolvent but not terminated. Loan applicants would have to prove that the loan will enable them to avoid insolvency and they will be reasonably able to pay benefits and repay the principal in 30 years.

Treasury would issue bonds to finance the loan program and oversee the portfolio, which would require annuity contracts and fixed-income portfolios matched to the current benefit obligations. Plan sponsors would also apply for financial assistance from the Pension Benefit Guaranty Corp., which would gain more funding to provide it. The Congressional Budget Office projects the loan program would cost $64 billion over 10 years.

The need for bipartisan support will be critical when the Senate takes up the issue, under the leadership of Ohio Sens. Rob Portman, a Republican, and Sherrod Brown, a Democrat, who are both committed to resolving the crisis. A spokeswoman for Mr. Brown said that while he applauds Mr. Neal for taking action in the House, "Sen. Brown is continuing to work with Sen. Portman toward a bipartisan solution that can pass the Senate." The Senate does not currently have its own bill.

Strenuous Republican opposition to what many consider a taxpayer bailout makes the loan program concept less likely to survive intact as the conversation shifts to other ways to alleviate the current funding crisis and prevent future problems.

Ideas include some considered by the Joint Select Committee on Solvency of Multiemployer Pension Plans, which ran out of time last year before producing any legislation by the end of the 115th Congress. After consulting with stakeholders, multiemployer pension experts, academics and Pension Benefit Guaranty Corp. officials, whose own multiemployer program faces insolvency, select committee members drafted several measures to help struggling plans.

Those measures included increasing the PBGC minimum guarantee level and premiums and 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. Other measures would give the PBGC more authority and resources to take financial responsibility for struggling plans, including $3 billion per year for 30 years to do more partitioning, which sets up a second plan to pay some of the benefits that the PBGC guarantees.

Congress is going to have to do something soon, said former House Speaker John Boehner, who represents a newly formed Retirement Security Coalition of employers, labor unions and policy experts trying to find a common-ground solution. "If we continue on the current trajectory, it's going to lead to the collapse of the entire system. We can't walk away from this," Mr. Boehner warned.

Coalition member and former New York Rep. Joe Crowley said the group is working to get members of Congress focused on the potentially devastating economic impact in each member district if no solution is found. Solving the multiemployer pension crisis "will have to be done in a bipartisan, compromise way. We recognize that hard choices and political courage will be needed to make it happen," Mr. Crowley said.

One of the more controversial ideas would require multiemployer plan officials to use a more conservative discount rate when measuring liabilities, a point that House Republicans tried to also make during the bill's markup. More conservative assumptions would require more contributions, which could have unintended consequences for healthier plans as well as further strain poorly funded plans.

Modeling done by Horizon Actuarial Services LLC for the National Coordinating Committee for Multiemployer Plans, a multiemployer advocacy group, last year found that changing discount rates would cause a dramatic increase in required contributions and raise volatility. And basing discount rates on corporate bond yields, as some Republicans have suggested, would cause the percentage of well-funded plans to drop to 7% from 60%. A similar analysis done by Segal Consulting on a representative sampling of their multiemployer clients found that using a 3.7% discount rate as a proxy for the current two-year corporate bond yield would require one plan to more than double its contribution rate to avoid a funding deficiency, while a second plan's contributions would jump to $400 million from $40 million over the next three years to avoid a funding deficiency.

"Many funds have been lowering discount rates in recent years because interest rates have declined. The most effective way to lower discount rates without causing too much pain is to lower them during years of good performance," said Gene Kalwarski, CEO and principal consulting actuary with Cheiron Inc. in McLean, Va.

Multiemployer plan officials and advocates are also pushing for flexibility to have variable future pension benefits that fluctuate with the market, instead of just becoming underfunded.

"That could prevent it happening in the future," Mr. Kalwarski said. New plan designs with variable benefits could eliminate underfunding and attract new employers, proponents say.

One of the biggest concerns is not letting the 130 or more plans in critical and declining status, with 1.5 million participants out of a total of 10 million, endanger the whole multiemployer pension system by further burdening employers or active participants who are already contributing more to get the same or fewer benefits than retirees.

To Mr. Kalwarski, the loan program idea "is the best option out there. Through annuitization or cash-matching portfolios, it takes care of a generation of pensioners who would otherwise face severe benefit cuts. It also prevents the PBGC from failing. Finally, it provides Treasury oversight to ensure appropriate investments," he said.

Every approach is going to have trade-offs, said Josh Shapiro, vice president for pensions at the American Academy of Actuaries in Washington. Just letting struggling plans become insolvent and wind up at the PBGC would drastically reduce many retiree benefits and put taxpayers on the hook, he said, while a loan program might present one of the lower-cost options.

A loan program could provide a lot of security for retirees, and give some plans time to rebuild assets through employer contributions and investment returns, yet loans also come with risk, Mr. Shapiro said. Projecting taxpayer costs and how active participants would fare over the long term would require "a lot of educated guesses," he said.