STUMP » Articles » A New Plan to Deal with Multiemployer Pensions » 20 November 2019, 19:37

I just received a press release: Grassley, Alexander Release Plan to Shore Up Failing Multiemployer Pension System

WASHINGTON – Sens. Chuck Grassley (R-Iowa) and Lamar Alexander (R-Tenn.), chairmen of the Senate Finance and Senate Health, Education, Labor and Pensions Committees respectively, today released a proposal to avert the collapse of critically underfunded multiemployer pension plans and reform rules for these plans to prevent future funding shortfalls within these important pillars of the American retirement system.

The Multiemployer Pension Recapitalization and Reform Plan creates new authority, based on past assistance for financial institutions, for the Pension Benefit Guaranty Corporation (PBGC) to take on liabilities from financially troubled multiemployer pension plans to help the plans pay their financial obligations to retirees and current workers. The draft legislation also makes fundamental changes to the regulation of these plans, so that all participants can be assured that their retiree benefits are appropriately funded and properly managed.
…..

The Multiemployer Pension Recapitalization and Reform Plan includes five major components:

1. Stabilize plans in immediate danger of failure

a. Partition authority and funding relief

2. Secure workers’ and retiree’s benefits

a. Secure the multiemployer system overall

b. Increase PBGC guaranteed benefit levels

3. Strengthen the PBGC’s ability to backstop the multiemployer system

a. Increase PBGC funding through shared responsibility

4. Put the multiemployer system on a stable path for the long-term

a. Reform the funding and liability measurement rules

b. Reform zone-status rule for greater predictive value

c. Reform withdrawal liability rules to encourage employers to stay and new ones to join

d. Improve plan-governance rules and PBGC supervisory authority

5. Ensure fiscal responsibility

a. Funding reforms and stakeholder contributions

b. Front-end federal contribution offset through additional revenue

Text of the White Paper can be found HERE and text of the Technical Explanation can be found HERE.

Comments on the reform proposals may be submitted to: MultiemployerReform2019@finance.senate.gov.

I will be taking a look at the technical paper in the future, but I do want to look at the white paper, as it’s very short.

OPPOSING VIEW

John Bury has his own precis:

1. New monthly co-payments to PBGC for active workers and retirees.
2. Loosen standards for being able to partition.
3. Higher benefit guarantee level.
4. Much higher premiums (similar to what is driving Single Employer plans to DC).
5. Federal bailout (“small portion of financial assistance”).
6. Less phony actuarial assumptions.
7. Strengthen zone rules (add purple and taupe?)
8. Add transparency to withdrawal liability calculations (no more Segal Blend?)
9. Reform reporting and disclosure requirements.
10. Allow hybrid plans – to be called “composite” plans.

So it’s a mix.

Which is basically my take.

WHITE PAPER ON PROPOSAL

As I said, the white paper is fairly short, and doesn’t link up directly to the technical paper nor the 5 main items in the press release.

Here are the main parts of the white paper.

Reformed Premium Structure

To finance the reforms and provide a stronger insurance guarantee to participants in the system,
the proposed reforms create a new premium structure, designed to broaden the base upon which
premiums are assessed in order to spread more equitably the costs of insuring benefits and to
ensure PBGC solvency over the long term. This new structure applies a co-payment to active
workers and retirees. However, because of the broadened contributing base, the co-payments are
significantly less than the amount of the typical benefit cuts retirees would face under current
law if a plan should fail.

I’m cutting it off here. I really don’t know enough if this is going to make much of a difference.

Mainly because private sector unions haven’t been a growing sector in a long time.

I don’t see this being much of a save.

PARTITIONING FAILING PLANS

Partitioning permits financially healthy employers to maintain a plan by carving out
plan liabilities attributable to participants who have been “orphaned” by employers who have
exited the plan without paying their full share of contributions. Those orphan liabilities
generally are the unmet obligations that degrade a plan’s funding status. Removing them allows
the original plan to continue to provide benefits in a self-sustaining manner, by funding benefits
with contributions from current participating employers.

So….

This seems to me that the whole concept of multiemployer plans is that it’s not supposed to be contingent on the individual employers, right?

Yes, “orphaned” participants have been mentioned in earlier union pension plan failures, but it seems to me that one is supposed to target making full contributions for the employees, right? Should it matter that a specific employer has failed, if they’ve paid for their employees’ pensions up to the moment that they failed?

The thing is, we know that a lot of the reason for “orphaned” employees getting screwed is that aspects of defined benefit pension plan valuations and contribution calculations is assuming that somebody in the future is going to make up for shortfalls.

That’s a very fragile assumption.

But, we are taking these in order. Let us check the next section.

Increasing PBGC Multiemployer Insurance Guarantee

[I’m on “hiatus” [cough], so I’m not bothering with all caps on my headers]

Under current law, PBGC has separate guarantee programs for single-employer plans and for
multiemployer plans. For multiemployer plans, PBGC uses a formula to calculates a maximum
benefit guarantee based on the amount of a plan participant’s years of credit service earned and
pension benefit accrual rate (the rate at which the worker’s pension benefit is built up over the
participant’s years of service).

…..
The proposed reforms include an increase in the guaranteed benefit level to provide participants
more insurance against underfunding – PBGC’s guaranty would cover more of their earned
benefits given a higher maximum guarantee level if their plan became insolvent. But, critically,
the proposal is balanced with other changes designed to improve the funding of the
multiemployer plans over time.

I have referred to the extremely low guaranteed amounts for MEPs before.

But related to that very low guarantee are the relatively low guarantees the MEP participants pay for that “cover”.

Obviously, all these element changes need to go together.

If the PBGC guarantees increase for MEPs, then the premiums for these guarantees need to also increase.

Unless one is proposing outright bailouts.

How are the Proposed Reforms Financed?

Oh, excellent question.

While the PBGC is a federal agency, it is not funded with tax dollars.

[yet]

The sponsor of a multiemployer pension plans pays a flat-rate premium to the PBGC for
insurance coverage, which is payable with respect to every participant with a benefit under the
plan. In 2019, the annual flat-rate premium is $29 per participant in a multiemployer plan. In
stark contrast, the flat-rate premium for 2019 in PBGC’s single-employer pension guarantee
program, which is in sound financial position, is $80 per participant.

To be a bitch, both $29 per year and $80 per year sound super-cheap for what is being guaranteed.

I work in life insurance and annuities, remember, so I see these amounts as extremely low for specific annuity-related benefits in a very low interest rate environment. I will put off explicit calculations for now.

The proposed reforms establish a new premium structure designed to enable PBGC to provide
financial assistance to the most troubled multiemployer plans, generate revenue to fund the
increased guaranteed benefit, and improve the financial condition of PBGC.

I’m somewhat skeptical of this claim.

While the foregoing reforms to the premium structure and other proposed reforms will
fundamentally strengthen the financial status of the multiemployer pension system, limited
federal taxpayer resources still will be necessary for the proposed reforms to be implemented in
the near term and to succeed over the long term.

Ahhhh, there is the bit I was expecting.

That said, it was always going to require a taxpayer-driven bailout for any rescue of MEPs.

Any reform plan that didn’t acknowledge that it needed taxpayer help to get it on its legs would be suspect.

[I will give you a moment to parse the above sentence]

[I’ve been reading a lot of George Eliot lately]

And no, we’re not done yet.

Making the Multiemployer Pension System Healthier

Oh good.

[and I, with a fairly libertarian bent would ask… is it really the business of the federal government to do this?]

Estimating Plan Liabilities

The Internal Revenue Code sets minimum-funding standards for private-sector defined benefit
pension plans, according to which plan sponsors are required to set aside funds to ensure the
payment of promised benefits. Minimum-contribution amounts are determined by the plan’s
actuary* and reflect an amount expected to be sufficient to pay for benefits over time.

I’m taking a stiff belt at this point, and…. yeah, this may require waiting til I look at the technical paper.

Under current law, multiemployer plan actuaries have wide discretion to set the assumptions and
funding methods used to measure their expected future liabilities, values of asset holdings, and
determine funding costs (i.e., how much they should set aside to be able to pay promised future
benefits).

When I learned how little real power actuaries had in pensions, I became a lot less critical about pension actuaries.

I did become a lot more critical about actuarial standards-setting bodies, though.

The regulation of the multiemployer pension systems stands in stark contrast to the regulation of
the private-sector single-employer defined benefit pension plans.

Remember how I mentioned I was gonna be a bitch earlier?

I’m gonna be a MEGABITCH right now.

via GIPHY

Hey, step off, Veronica.

I really do not want to hear about how much looser multiemployer pension regulations are compared to single employer private pension plans.

Because:

1. Public pension plans are, essentially, not regulated at all
2. There are no guarantees for public pension participants
3. Many public pension plans are going to fail, by which I mean the “pre-funded” aspects will run out of assets and need to run pay-as-they-go
4. There are no guarantees for public pensions

And I could actually continue from there, but I won’t [right now]

Multiemployer pensions, at least, have guarantors outside the original pension benefit sponsors.

That whole argument has to wait for another time, because it doesn’t actually involve MEPs.

Zone Status Measurement

SIGH

via GIPHY

No, we’re moving on. I don’t have energy for this right now.

Withdrawal Liability

Ah, now we’re getting somewhere.

One of the huge things driving this whole political issue is the Central States Teamsters pension plan.

I think John Bury made a solid case that one of the things that killed Central States was that UPS withdrew from the Central States Teamsters pension plan, and paid a lot less than their withdrawal liability was worth [because of awful pension actuarial practice]. The key post by John Bury: FO Central States (3): UPS Withdrawal – 2007. Yes, it’s technical, but I think he’s correct.

But all that said, unions want to retain some viability outside government employers.

If unions become a government-employee-only thing, then it becomes a hell of a lot easier to target unions to just get rid of them. Especially since government employee unions don’t seem to be negotiating with their political partners, so much as colluding.

It is “unfortunate” for unions that they have far more government employee members than private sector members…. and there’s no “but” to end this. The unions have never looked at the real power politics in the United States. All their calculations have been fairly short-term, which is why the U.S. private unions are also short-term.

[Recall: to an actuary, anything less than a century is short-term planning]

WRAPPING UP THE WHITE PAPER

Okay a few other excerpts:

Safeguarding Reform

In order for the reform proposal’s partition program to operate effectively, the proposed reforms includes transfer of a limited amount of federal taxpayer funds to PBGC.

Yes, we know there needs to be some sort of bailout. Quit apologizing for it. Just say it’s a bailout.

Keeping Participants and Regulators Informed

Reporting and disclosure by multiemployer pension plans under current rules are inadequate and
need to be reformed.

I’m watching you.

via GIPHY

Looking to the Future

The proposed reforms will provide an option for the sponsors of a multiemployer plan to
establish a new hybrid pension plan – called a “composite” plan – on a prospective basis. Under
this concept, the sponsors of a multiemployer plan can set up a hybrid plan that pools employer
contributions for investing, but only provides benefits to participants based on the contributions
and any associated gains on their investment.

Again, I will cut it off here.

I think that retirement income that one can rely on is important.

But I do know that an iron-clad guarantee is extremely expensive, especially in a super-low interest rate environment.

[don’t ask me about negative interest rates… PTUUUUI!]

There are some extremely politically-sensitive pension plans failing right now…

via GIPHY

CENTRAL STATES TEAMSTERS

via GIPHY

So I am extremely skeptical (as mentioned earlier).

Look, I understand the professional politicians (of which I am not) have got to get buy-in. But I do need to look at the specific details which really show what will likely occur long-term.

I have my own preconceived notions, I do not deny. I am looking for what specific groups have to give up in these plans. Obviously, taxpayers are expected to chip in. But if nobody else is expected to have to give up anything?

Mmmmmmmmm. I didn’t promise Central States Teamsters a damn thing. Why, exactly, am I asked to throw in when the unions and their employers are not doing it?

In addition, the most egregiously failing multiemployer plans are unlikely to be able to be bailed out by those unions and future employer contributions, so I am curious if the taxpayer bailout will supposed to be effective all at once or assuming future taxpayers will also throw in.

Because that’s what the Butch-Lewis Act, the other bailout plan on offer, assumes. Oh, they don’t admit that explicitly, but it’s pretty clear that the bailout they are extending assumes that future taxpayers will continue the union plans… even though the employers participating are dwindling.

I am extremely distrustful of all of this, in both the short-term fix for the most impaired plans and in the supposed path to long-term stability.

I would like to think it can be done via legislation.

But I am very skeptical that the politicians…and unions…. understand what is needed.

So we will see. I will look at the technical paper later.