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  1. Home
  2. PENSION FUNDS
May 23, 2022 12:00 AM

Multiemployer plans await final PBGC aid rules

Interim guidance leaves questions on how to best calculate assistance for struggling funds

Brian Croce
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    Michael Kreps
    Photo: Ciara Cusseaux
    Michael P. Kreps hopes the PBGC doesn’t change anything that requires rework.

    It's been roughly six months since the Pension Benefit Guaranty Corp. began approving special financial assistance applications for struggling multiemployer plans, and while stakeholders are pleased with the pace of approvals and transparency from the PBGC, they're also eager for the agency to issue final rules concerning the amount of aid plans will receive.

    "We're all living under an interim final rule, which is good, I'm glad we have that, but there's always some nervousness about will the agency change its mind and necessitate us to go back to the drawing board and redo calculations and redo work?" said Michael P. Kreps, Washington-based principal and co-chairman of the retirement services practice at Groom Law Group. "I think the hope is PBGC can get this rule out and we don't have to redo stuff we've already done."

    Mr. Kreps and others may not have to wait much longer for an answer as the PBGC sent a final rule to the White House's Office of Management and Budget for review late on May 20 as Pensions & Investments went to press. The review process could take several weeks.

    Democrats in March 2021 passed the American Rescue Plan Act, which in part created a federal assistance program for struggling multiemployer funds.

    The PBGC as of May 18 has approved more than $6.1 billion in special financial assistance to 25 eligible plans that cover more than 117,000 workers and retirees.

    A multiemployer plan is eligible for 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, 2021; 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, 2021, has not been terminated.

    Under that American Rescue Plan, the PBGC issued an interim final rule in July that established how multiemployer plans can apply for special financial assistance, created a methodology for how that amount is calculated and outlined restrictions for how those assets can be invested, among other things.

    Many stakeholders submitted comments to the PBGC taking issue with the interim final rule, in part because it mandated plans use current assets, future revenues and revenue derived from withdrawal liability payments when making their assistance calculations. That reduces the amount of assistance a plan can receive, they said.

    The special financial assistance — which the PBGC estimates will total about $94 billion — was designed to shore up struggling multiemployer pension plans through 2051.

    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.

    Moreover, the mandated interest rate used for calculating the amount of special financial assistance a plan receives assumes a 5.5% return. 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%.

    Related Article
    PBGC OKs first application under multiemployer aid program
    Awaiting final rule

    Some in the multiemployer plan industry, like Gene Kalwarski, CEO and principal consulting actuary at McLean, Va.-based Cheiron Inc., are concerned that plans receiving aid under the interim final rule will run out of money before 2051.

    "I'd like to see the final regs take care of that issue so plans don't run out of money," Mr. Kalwarski said about the investment restrictions. "It's almost like the interim regs were written in a way just to kick the can down the road and let it be someone else's problem later."

    Added Mr. Kreps: "We're all very anxious to see that final rule."

    Some struggling multiemployer plans are waiting to submit an application until final rules come out, said David Brenner, Boston-based national director of multiemployer consulting and senior vice president at The Segal Group.

    The PBGC received more than 100 comments on its interim final rule, "which have been very helpful in raising issues for our attention and consideration," a PBGC spokesperson said in a statement to Pensions & Investments.

    Plans that the PBGC has already approved for special financial assistance can modify their application if the final rule changes a provision that would result in the plan receiving more aid, said Joseph Hicks, vice chairman of the Washington-based American Academy of Actuaries' multiemployer plans committee.

    Related Article
    PBGC approves $1.7 billion in assistance for 2 multiemployer plans
    Effect of aid uncertain

    Whether a plan receives enough aid to last 30 years depends on a confluence of factors, like the plan's contributions over that time and the amount of the plan's special financial assistance assets compared to its non-special financial assistance assets, Mr. Hicks said.

    "I think there are concerns that in some of these cases that these plans will fall short of the 2051 goal, however I don't think you can make a general statement that all plans will either fall short or exceed the 2051 deadline," Mr. Hicks said.

    When it comes to calculating the amount of special financial assistance, the impact of rising interest rates will likely be muted because a 24-month interest rate average is used, Mr. Hicks explained.

    Still, in an application on which Cheiron assisted and has been approved, Mr. Kalwarski said, "We tried to get it in as soon as possible so that we could lock in the interest rate at the end of last year and not let interest rates that might increase in 2022 impact and lower the amount of special financial assistance." Mr. Kalwarski declined to name the fund.

    The PBGC has 120 days to decide on an application, which multiple sources said hasn't been an issue. Mr. Kalwarski also said the application process has been transparent and the back and forth with the PBGC was positive.

    There are about 1,220 multiemployer plans, and approximately 160 of them were projected to become insolvent in the next 20 years, Mr. Brenner said.

    PBGC Director Gordon Hartogensis said in a statement that the program will help about 3 million people who rely on these plans for their retirement security.

    Sen. Patty Murray, D-Wash., chairwoman of the Senate Health, Education, Labor and Pensions Committee, in a statement touted the program's early success. "People who had their benefits torn away through no fault of their own are being made whole, and others who were at risk of having their pensions slashed are finally getting some peace of mind," she said. "I'm working to make sure this progress continues and the special financial assistance we passed in the American Rescue Plan helps as many people as it can, because the last thing anyone needs — especially when so many things are costing more — is to suddenly have less because they couldn't rely on the pension they worked so hard to earn."

    The special financial assistance program is helping many Americans, but more needs to be done, said House Committee on Education and Labor Chairman Robert C. "Bobby" Scott, D-Va., in a statement. "I remain committed to passing legislative solutions that will provide every worker with access to a secure retirement," he said.

    But while Democrats in Congress are pleased with the program, Republicans continue their opposition. Rep. Virginia Foxx, R-N.C., ranking member of the House Committee on Education and Labor, called the special financial assistance program a "short-sighted exercise in futility," in a statement. "Temporarily buoying failing multiemployer pension plans simply kicks the can down the road," she said. "Applications for assistance, both approved and under review by PBGC, show that these plans will still go insolvent despite a massive infusion of taxpayer funds. Democrats have a strong appetite to pump billions of dollars into a failed system with the expectation that something will miraculously change. They're fooling themselves while robbing taxpayers blind."

    Related Articles
    PBGC approves $261 million in aid to 2 multiemployer plans
    PBGC OKs $1.9 billion in assistance for 2 multiemployer plans
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