Single-employer plans not forgotten in new law

While multiemployer pension provisions in the American Rescue Plan Act of 2021 got more attention, relief for single-employer plans will be more significant and long-lasting, sponsor advocates say.

The ambitious $1.9 trillion COVID-19 relief package signed by President Joe Biden March 11 has several goals to help the country recover from the pandemic, from ramping up vaccinations to helping people impacted by the economic fallout. Those measures are also expected to give the U.S. economy a much-needed boost.

The Democratic majority in Congress, moving the package largely without Republican support, also helped struggling multiemployer pension funds. After a multiyear effort to enact structural reforms fell short, now the most at-risk plans have $86 billion in federal assistance grants to pay benefits, if they can show the grants will help them survive for 30 years.

For single-employer pension plans, the pension funding relief in the American Rescue Plan grabbed few if any headlines, but "is very welcome," said Dennis Simmons, executive director for the Committee on Investment of Employee Benefit Assets in Washington, whose 111 members are asset owners with more than $2 trillion of defined benefit and defined contribution plan assets.

Benefits come from two welcome pieces of the new law. One permanently extends the amortization period for calculating unfunded liabilities to 15 years instead of the seven years that were one of the core remaining features of 2006's Pension Protection Act. Plan sponsors can even go back as far as 2019 with the longer amortization periods.

Another provision extends smoothing rules for interest rates used to calculate pension liabilities that would have started phasing out this year. The new rules can now be used beginning in 2022.

Extending and enhancing interest rate smoothing to avoid creating inflated plan funding obligations is a critical change in a low-interest-rate environment now facing plan sponsors, particularly those impacted by the pandemic, sponsor advocates said.

"It is something that our members have been talking to policymakers about for quite a while. It's more stabilization, flexibility and predictability," Mr. Simmons said.

A 2020 American Benefits Council study of the pandemic's impact on the defined benefit plan system found that of the 703 companies surveyed, average funding obligations were projected to double in 2021, before the new law.

"I think Congress did the system as a whole a favor by allowing this kind of flexibility," Mr. Simmons said.

More predictability and flexibility with funding obligations could also help sponsors make decisions about pension derisking and drive changes to pension plan asset allocations over time, including more shifting to fixed income and alternatives, said Kevin McLaughlin, head of liability risk management North America for Insight Investment Management Ltd. in New York.

"It's almost as significant as PPA in terms of changes to funding. For many plan sponsors, there will be no contributions for a period of time," he said. While a sponsor's previous objective was to minimize contributions, "now because the contributions are much lower and they are way out in the future, counterintuitively it means they can derisk sooner," Mr. McLaughlin said. "They can move much more into cash-flow matching, more fixed income and LDI. The better-funded plans can almost move to hibernation. Effectively, you can design a new strategy, a new glidepath. You have a longer time horizon to close the gap. That's 100% of the conversations we are having now," he said.

For multiemployer pension funds, the American Rescue Plan brings immediate relief to as many as 200 plans that are deemed to be "critical and declining," less than 40% funded, or with a higher ratio of inactive to active participants. The $86 billion in grant money can also be spent fulfilling the new law's mandate to restore benefits reduced by plans through the Multiemployer Pension Reform Actof 2014.

While Republicans criticized the grant program as a bailout for union plans with no strings attached, the American Rescue Plan multiemployer provisions also provide immediate relief to the Pension Benefit Guaranty Corp.

The PBGC's multiemployer guarantee program was also headed toward insolvency with the impending collapse of many plans, most notably the $12.3 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., with $31 billion in unfunded liabilities. The new law gives the PBGC program a reprieve from its once-looming deficit. To offset the legislative cost of the grants, multiemployer premiums will rise to $52 per participant beginning in 2031.

The agency has 120 days to come up with ground rules for receiving the grant money. The PBGC did not respond to a request for comment.

Teamsters International Vice President John Murphy estimates that at least 200 plans are eligible for the grants, "and we suspect that number is going go up because some plans are right on the cusp."

"This is the most significant step in addressing the underfunding problem in the multiemployer system," Mr. Murphy said. It belonged in the COVID-19 relief package because so many participants were laid off "and all the plans were adversely impacted," he said.

Although it was not a multiemployer reform package, there is one change: for interest rate assumptions. plans applying for grants must use corporate bond rates and can only invest the grant money in investment-grade bonds, unless the PBGC authorizes something else.

Even for healthy plans, "the message is pretty clear. You better start moving toward that. Let's get your funding right," Mr. Murphy said.

That will start a trend "toward less risky investing," said Gene Kalwarski, CEO of actuarial consulting firm Cheiron Inc. in McLean, Va.

PBGC officials can now build up a reserve, which "will dramatically change the next report," said Mr. Kalwarski. And healthy plans "are happy about what isn't in this plan," since previous reform proposals included one in the Heroes Act passed by the House in October called for stricter discount rates and allowed for new composite plans combining defined benefit and defined contribution features.

The American Rescue Plan also had a brief mention of public plans — sort of. It called for $350 billion in direct aid to state and local governments but said that funds "cannot be deposited into a public pension fund" or used to offset taxes. With state and local government revenues now up $3.2 billion, thanks to robust gains in financial markets and federal assistance, the non-profit Tax Foundation in Washington said, the latest cash infusion "has become a solution in search of a problem."