Multiemployer assistance rule from PBGC leaves stakeholders confused

After years of going back and forth on Capitol Hill with no results and a looming crisis only getting worse, multiemployer pension plan stakeholders were elated when Democrats in March passed the American Rescue Plan Act, which in part created a federal assistance program for struggling multiemployer funds.

But after the Pension Benefit Guaranty Corp. in July unveiled an interim final rule detailing the requirements for special financial assistance applications and related restrictions and conditions on plans that receive aid, many of those same stakeholders have grown frustrated.

The PBGC "has turned the intent of the authors of the statute upside down," said John F. Murphy, Boston-based international vice president of the International Brotherhood of Teamsters. The "PBGC is not the legislative body, they are the regulatory authority, they cannot undo the clear purpose of the statute."

Under the American Rescue Plan Act, a multiemployer plan is eligible for special financial assistance if it satisfies one of four criteria: it has been in critical and declining status in any plan year beginning in 2020 through 2022; it has had its benefits suspended as of March 11; it is in critical status, has a modified funding ratio below 40%, and has a ratio of active-to-inactive participants of less than 2 to 3; or it became insolvent after Dec. 16, 2014, but as of March 11 has not been terminated.

The special financial assistance — which the PBGC estimates will total about $94 billion — was designed to shore up struggling multiemployer pension plans through 2051. There are about 1,220 multiemployer plans, and approximately 160 of them were projected to become insolvent in the next 20 years, according to David Brenner, Boston-based national director of multiemployer consulting and senior vice president at The Segal Group.

The PBGC's interim final rule — the agency was required to promulgate regulations based on the American Rescue Plan — established how multiemployer plans can apply for special financial assistance, created a methodology for how the amount of special financial assistance is calculated, and outlined restrictions for how special financial assistance assets can be invested, among other items.

To calculate the amount of special financial assistance a plan would receive, the interim final rule sets forth a methodology that takes the present value of plan obligations — the value of its benefit payments and administrative expenses — and subtracts from it the present value of plan resources — its assets, including projected withdrawal liability payments, and projected employer contributions.

Mr. Murphy has taken issue with PBGC's interpretation and said the agency has "far exceeded" its authority by mandating plans use current assets, future revenues and revenue from withdrawal liability payments when making special financial assistance calculations because it reduces the amount of assistance a plan will receive.

"Reading the language of the statute, how the PBGC can get to that interpretation defies logic," Mr. Murphy said. "It's almost as if they intend to undermine the statute by making that interpretation. It guarantees that the most severely underfunded plans will run out of money before the 30-year period is up because the amount of SFA will be reduced by what PBGC is saying has to be calculated in determining the amount."

The American Rescue Plan stated that the amount of special financial assistance provided to a plan "shall be such amount for the plan to pay all benefits due" from the time the assistance is started through 2051, Mr. Murphy noted. "The statute said pay all benefits due. It doesn't mention assets, doesn't mention future revenues, doesn't mention withdrawal liability," Mr. Murphy added.

The mandated interest rate used for calculating the amount of special financial assistance a plan receives is currently about 5.5%. But under the interim final rule, the PBGC also requires that special financial assistance assets must be invested in investment-grade bonds, which currently have annual yields of about 2% to 2.5%.

The roughly 300-basis-point disconnect between the two numbers introduces a "negative arbitrage," said Joseph Hicks, vice chairman of the Washington-based American Academy of Actuaries' multiemployer plans committee. "If you calculate a projected solvency date assuming that the assets are going to earn 5.5% and instead they're invested in something that only earns 2% to 3%, does that mean that the plan is going to go insolvent prior to the 30-year period ending in 2051?" Mr. Hicks said.

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, said the interim final rule's investment restrictions will have the biggest negative impact.

"They are so restrictive that plans are prevented from being able to get what we would consider a normal return on the investment," Ms. Robinson said. "When Congress implemented the SFA, their idea was that this money would help plans remain solvent through 2051, but with these restrictions we feel that this won't be enough money for plans to remain solvent through that time."

Several stakeholders in comment letters to the PBGC and in interviews lauded the PBGC with issuing the interim final rule so soon after Congress passed the American Rescue Plan. But those stakeholders also said more work is needed.

"When you've got members of Congress writing in to explain what their congressional intent is, you would hope that that will have some influence on the PBGC," Mr. Brenner said. A comment letter from Senate Majority Leader Chuck Schumer, D-N.Y., and six fellow Senate Democrats "goes to the heart of the discount rate/interest rate assumption part," Mr. Brenner said.

The Aug. 11 letter said the interim final rule's "flawed assumptions, taken together with incompatible investment restrictions, make it structurally unlikely to provide plans with funding sufficient to ensure solvency through 2051."

The senators' comment letter continued: "An interpretation which assumes that Congress intended for the PBGC to assume a 5.5% return on a class of assets that typically yield about 2% on average is illogical and inconsistent."

Ms. Robinson of the ERISA Industry Committee said investment restrictions on special financial assistance assets may also create an incentive for plans to take on riskier investments with current plan assets in order to make up the deficit. "We think by removing restrictions or including more flexibility, it reaches the goal of making sure plans are solvent through 2051 and also makes sure that plans are able make more secure investments with their current assets," she said.

The PBGC received more than 100 comments on its interim final rule, and American Academy of Actuaries' Mr. Hicks said the agency was aggressive in asking for feedback on key issues. "I think they've identified what the issues are, and I think PBGC is looking for ways in order to help the American Rescue Plan Act be as effective as possible while still staying within the confines of their interpretation of the statute," he added.

Based on the number of comments PBGC received critical of the interim final rule, sources said they're optimistic changes will be made in the final version. If changes aren't made, the interim final rule may face legal challenges, Mr. Murphy said. But before that point is reached, he's hopeful the PBGC's board of directors — the secretaries of labor, treasury and commerce — will "use good judgment here and pay attention to all the comment letters and make the necessary adjustments," Mr. Murphy added.