Two key Republican senators say they want to let managers of some struggling multiemployer defined benefit pension plans cut off the dead limbs.
Sen. Charles Grassley, R-Iowa, and Sen. Lamar Alexander, R-Tenn., released a rescue proposal Wednesday that includes a “partition” provision.
Under the provision, managers of designated multiemployer plans could keep responsibility for the pension obligations the plans had the assets to support, while passing responsibility for the other obligations to the Pension Benefit Guaranty Corp. (PBGC).
Multiemployer Pension Plan Background
Grassley is the chairman of the Senate Finance Committee.
Alexander is the chairman of the Senate Health, Education, Labor and Pensions Committee, to release the proposal.
The PBGC is the organization that insures U.S. defined benefit pension benefits. It charges employers to insure single-employer plans. It also charges the sponsors of multiemployer plans, which were often organized by unions, to insure the multiemployer plans.
Managers of about 125 multiemployer plans have already told the PBGC that the plans are on track to become insolvent over the next 20 years, and strand about 1.3 million participants.
How Grassley Sees the Situation
Without reforms, the PBGC itself is on track to become insolvent by 2026, Grassley said in a statement about the Grassley-Alexander proposal.
“When that happens, PBGC will not be able to pay either current or future retirees more than a very small fraction of the benefits they have been promised,” Grassley said. “Consequently, substantial reductions in retirement income are a real possibility for the millions of workers and retirees who depend on benefits from these plans.”
Helping struggling multiemployer plans quickly could save money in the long run, Grassley said.
House Democrats have also developed a multiemployer plan rescue program.
Grassley described that proposal as a “pure, no-strings-attached, bailout plan.”
That proposal would not make the pension plans or the PBGC sustainable, Grassley said.
If adopted and implemented as written, the Grassley-Alexander proposal would:
1. Make a partition available only to certain types of multiemployer pension plans:
- The Central States Plan, the Road Carriers Local 707 Pension Plan, or the United Mine Workers of America plan;
- Plans that were already in critical and declining status as of Wednesday;
- Plans in declining status that used the Multiemployer Pension Reform Act of 2014 to suspend benefits; or
- Plans that are in critical status, but not declining status, have less than 40% of the funding they need to support their obligations, and have an active-to-inactive participant ratio under 40%.
2. Require an eligible multiemployer plan that uses the partition provision to limit benefits accruals.
The plan would have to cap the monthly accrual rate at 1% of annual contributions.
3. Require an eligible employer that uses the partition provision to adopt all reasonable measures to avoid insolvency.
“All reasonable measures” could include benefit suspensions of up to 10%.
The benefits of participants and beneficiaries who were ages 80 years or older would be excluded from the suspensions.
4. Have a partition process split an eligible plan into an “original plan” and a “successor plan.”
The PBGC would help most successor plans meet their benefits guarantees, up to the PBGC guarantee level. Special rules would apply to the Central States Plan and the Road Carriers Local 707 Pension Plan.
5. Have a successor plan take enough pension benefits liability from the original plan to give the original plan the ability to stay solvent indefinitely.
The analysis would have to include the payments for PBGC premiums. The entity in charge of the original plan would have to pay the PBGC benefits for the participants with benefits obligations transferred to the new plan. The new plan would be covered by PBGC benefits guarantees, but the original plan would not have to include the pension obligations of the new plan in its own funded status calculations. The goal is to let the healthy parts of a multiemployer pension plan stay in operation while providing protection for the participants in the unhealthy parts, according to the proposal text.
6. Increase the flat-rate portion of the PBGC premium to $80 per participant, from $29.
The proposal would also set the variable-rate portion of the premium to 1% of a plan’s unfunded current liability with respect to benefit levels. The proposal would also set rules for capping the variable-rate portion of the benefits. The maximum cap would be $250 per plan participant.
7. Change the multiemployer plan funding rules.
One provision would set rules for the interest rate assumptions used to project future liabilities, to try to keep a plan’s managers from using an unrealistically high discount rate.
8. Update the system for grading plans.
The healthiest plans would continue to be blue zone plans, and the sickest plans would be red zone plans.
9. Set payment requirements for employers that withdraw from multiemployer plans.
The annual withdrawal-liability payment amount would generally be equal to 100% of the employer’s highest contribution base units in the past 20 years, multiplied by the highest contribution rate in the past 10 years.
If, for example, the funded status of a multiemployer was less than 60%, an employer that stopped contributing to the plan would have to pay the equivalent of 20 years of its annual plan payments. The annual plan payment amount would be at least as high as the highest annual payment the employer had made to the multiemployer plan in the past 20 years.
10. Create a new type of “composite plan” that would combine defined benefit pension plan features and defined contribution plan features.
Eligible retired participants would get an annuity benefit, but the amount would be limited to the amount supported by the plan assets, rather than by what the plan originally promised the participants. The composite plans would be exempt from PBGC guarantees and premium bills.
A Multiemployer Plan Group’s Reaction
Sean McGarvey, chairman of the National Coordinating Committee for Multiemployer Plans, said in a statement that the Grassley-Alexander proposal would be too hard ton plans, participants, employers and unions, and on the 85% of multiemployer plans that have enough funding.
“We look forward to working with a bipartisan group of Senators and Senate leadership over the next four weeks to ensure that reform legislation rescues these failing plans, rescues the PBGC, and reforms the entire multiemployer system,” McGarvey said in the statement.
Many employers try to shift responsibility for defined benefit pension plans to insurers, by buying group annuities.
That means the Grassley-Lamar proposal could have a direct or indirect effect on insurers’ pension risk transfer annuity sales.
For financial professionals in the kinds of markets where multiemployer pension plans are common, such as communities that have, or once had, large auto manufacturing plants, efforts to shore up multiemployer plans could affect income planning needs.
In theory, retirement planning clients who expect to lose their pension benefits could buy more annuities, or more life insurance-based retirement savings arrangements.
But actual or anticipated loss of pension benefits could reduce some retirees’ ability to pay for deferred annuities, income annuities, Medicare plans, long-term care insurance, and related products and services.
A link to the Grassley-Lamar proposal and a link to a summary of the proposal are available here.
Correction: The original version of this article gave an inaccurate description of the basis for plan partitions. The partition arrangement would be based on the amount of pension liabilities the original plan could handle while being in a position to remain solvent indefinitely.
— Read Retirement Bill Competes With ‘Hair on Fire’ Issue for Senators’ Attention, on ThinkAdvisor.