Republican Sens. Charles Grassley (R-IA) and Lamar Alexander (R-TN) have issued a white paper and technical explanation that discuss the challenges facing multiemployer pension plans and the PBGC and a multiemployer pension and recapitalization reform plan.
Grassley and Alexander, who chair the Senate Finance Committee and the Senate Committee on Health, Education, Labor and Pensions (HELP), respectively, issued the plan on Nov. 20.
A System ‘in Crisis’
“The multiemployer pension system, which promises retirement benefits to over 10 million participants, is in crisis,” the paper begins, warning that approximately 125 multiemployer plans are at risk of failing in the next 20 years, which puts more than 1.3 million plan participants at risk of not receiving the benefits they were promised. Furthermore, “another large group” of participants are at risk because they are part of plans that are in critical status and do not expect to meet the minimum funding that the law requires.
And it’s even worse than that, the paper warns, as the guarantees that the federal government has given through the PBGC have not been updated to keep up with changes in plan benefit levels or inflation. “As a growing number of participants face plan failures over the next 20 years, the benefit guarantees provided by the federal government are increasingly likely to fall short of the amount of benefits promised by their plans,” it says.
Not only that, the paper says, the projected rise in insolvencies threatens the PBGC, and in turn, those it serves because it is funded by premiums paid by insured pension plans and their participants; however, its premium-based funding is falling short of liabilities, which are rising.
The paper is quite blunt:
“The financial challenges in PBGC’s multiemployer pension program is exacerbated by the fact that neither the troubled multiemployer plans nor PBGC currently have the flexibility or financial resources to mitigate the effects of anticipated insolvencies adequately. Should a critical mass of plan insolvencies drain the PBGC multiemployer insurance fund, PBGC will not be able to pay either current or future retirees more than a very small fraction of the benefits they were promised. Consequently, a substantial reduction in retirement income may be a real possibility for the millions of workers and retirees who depend on benefits from these plans.”
Proposed Reforms
The reforms that the paper and the Technical Explanation that accompanies the white paper made address the immediate financial challenges of a number of plans in critical financial condition. However, Grassley and Alexander also seek “to make significant changes to the management and operation of all multiemployer pension plans so that, moving forward, all plans will be better funded and more transparent to participants, sponsoring employers, and government regulators.”
“The reforms,” they say, “are designed in a balanced way to avoid tipping more plans into a poorer funded condition, and also to avoid exposing taxpayers to the full risks associated with the largely underfunded multiemployer system and pushing the PBGC into insolvency. Providing relief to critical and declining plans as part of the reforms is contingent on changes to the legal framework of the multiemployer pension system to ensure that the plans operate on a sound financial basis in the future.”
Highlights of the proposed reforms include:
Create a new premium structure to finance the reforms, provide a stronger insurance guarantee to participants in the system and 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. They would:
- raise the current flat-rate premium from $29 per participant to $80, a level more consistent with that required of private-sector single-employer plans as described above;
- establish a variable-rate premium tied to a plan’s funding status to manage the risks stemming from more poorly funded plans;
- create a new stakeholder copayment assessed on all employers and unions participating in a plan; and
- create a sliding-scale copayment applied to retirees receiving benefit payments from a plan, based on the plan’s funding status.
Increase the guaranteed benefit level for the vast majority of participants in the system to greatly reduces the risk of significant reductions in income that retirees face should the plan in which they participate become insolvent.
Revise the partition qualification requirements. Partitioned plans would be subject to limitations on future benefit accruals and limited benefit reductions, structured such that workers will be made better off than under current-law partition requirements.
Strengthen the rules for measuring present values of known future obligations. They would phase in new measurement standards over time as necessary to avoid unnecessary shocks and limit initial near-term contributions initially, when appropriate, to a measure of affordability for employers.
Require plan trustees and actuaries to measure and project plan assets and liabilities more prudently and accurately. These reforms are intended to help plans improve their funding and better protect plan participants’ and taxpayers’ interests, as well as not punish plans for past inaccuracies.
Strengthen the zone rules. The Pension Protection Act introduced new funding rules for multiemployer pension plans based on tiered funded (zone) statuses, which operate in addition to the minimum-funding standards. Plans would be required to:
- look farther into the future in estimating their financial status;
- institute a form of “stress testing” to check whether a plan can remain financially sustainable through potential economic and demographic “shocks”; and
- bolster the steps a plan must take when it begins to show signs of financial hardship.
Replace the current withdrawal liability rules with a simpler and more transparent method for determining an employer’s withdrawal liability. The proposal:
- would require measurement of withdrawal liability using the same methods and measures as the plan uses to measure its assets and liabilities for funding and reporting purposes; and
- base the payment of withdrawal liability amounts on the plan’s funded status, once the withdrawal liability is measured under the new rules.
Transfer a limited amount of federal taxpayer funds to PBGC.
Protect taxpayers with internal plan governance reforms.
Subject plan trustees to greater safeguards in order to reduce the moral hazard they faced and to make it clear that this proposal, seeks to safeguard taxpayers from further financial risk.
Strengthen disclosure requirements for multiemployer plans and increase penalties for late filing of information and for filing inaccurate information.
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.
