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July 30, 2019

Some Good News On Multiemployer Pensions

How, you ask, can there possibly be good news on multiemployer pensions?

The updated 2019 PBGC projections aren’t out yet but there’s no reason to believe the numbers are any better than last year’s “insolvency in 2025” multi-employer PBGC fund projections; likewise, the government’s form 5500 data, the source for publicly-available information on plan funded status, only has updated data for a handful of plans.

The House is getting closer to voting on the same bill that failed last year, the Butch Lewis Act, which promised to save multiemployer solutions through the gimmick of long-term, low-interest, and ultimately forgivable loans, having passed a replica of this bill through the House Education and Labor Committee in early June and through the Ways and Means Committee just last week.  There’s no bill at all in the Senate.

I get e-mails from workers or retirees who are counting on these pensions, or from concerned family members, and they see no sign of hope.

And so on.

But I recently had a conversation with Michael Scott, Executive Director of the National Coordinating Committee for Multiemployer Pensions (NCCMP), who surprised me with his optimism about the situation, because he believes that Congress is actually following their tradition of finding bipartisan solutions when it comes to pensions, and is working hard to come up with a legislative solution.

And, after all, we actuaries like to comfort ourselves with the notion that major pension reform legislation has a history of bipartisanship, and we’re not entirely wrong.  As reported at the time, the most recent pension reform, the Multiemployer Pension Reform Act of 2014,  itself took the form of an amendment to a budget bill, without much debate on the pension changes because of the rushed and behind-closed-doors of the entire budget process.  The prior overhaul in pension legislation, the Pension Protection Act of 2006, passed by a vote of 93-5 in the Senate and 279 – 131 in the House.  And at present, we have further retirement legislation winding its way through Congress in the form of the SECURE Act, which (though it has since stalled in the Senate), passed the House by a vote of 417-3.

So what would a multiemployer rescue bill look like if it isn’t the Butch Lewis (forgivable, low-interest) loan program?  Scott pointed me to the NCCMP “Common Sense Principles for Multiemployer Pension Reform,” which he believes reflects the contours of a solution, and, yes, among these is what we’ll inevitably have to call “the B word,” a bailout, though in the document it’s more gently called a “liability removal tool,” which will

[e]xpand upon existing partitioning rules to allow plans to regain solvency by transferring pension liabilities to the PBGC. The liability removal tool will be a one-time program to address the existing funding problems for critical and declining status plans.

There is no getting around this; back in December, I detailed the ways in which the original pension legislation, ERISA, and subsequent laws, put roadblocks in front of plans trying to properly fund their plans, and suggested that a better framing than “bailout” is that idea that the government would be making “restoration payments” in acknowledgement of these regulatory flaws.  As a reminder, too, any such program would not be dealing with existing employers having failed to set aside enough money for their employees but has to do with “orphan liabilities” in plans where so many past participating employers have gone bankrupt.  (Recall that, at the extreme, over 90% of United Mine Workers plan participants are retired, and nearly 85% of the Central States/Teamsters participants.)

But the NCCMP’s Principles go beyond a simple bailout for existing underfunding.  Here are two further items which are key to the future of the plans:

First, they write, new legislation should

Ensur[e] that the Crisis is Not Repeated – Trustees need additional tools to proactively manage plans to improve plan funding, react more effectively to market volatility, and to ensure that multiemployer plans remain well funded once the current crisis is resolved.

This is, yes, easier said than done, but this aligns with the point that I attempted to drive home back in the fall.  In House Committee testimony in the spring (or, more precisely, in written replies to follow-up questions), the NCCMP detailed exactly these issues, and concluded,

The bottom line is that the current state of financially distressed multiemployer pension plans can be directly traced back to the actions and inactions of the U.S. government.

(Is the federal government the only party to blame?  No, of course not — my quality time at the microfilm reader with the 1975 Wall Street Journal on Mafia corruption at Central States says otherwise.  But it’s an important part of the story.)

Second, the NCCMP writes,

New Plan Designs Need to be Created – Funds must be given the option to adopt new plan designs, such as variable defined benefit plan design modifications, enabling legislation for 414(k) plans, composite plans, and other new plan designs, which will allow them to attract new employers, eliminate underfunding, and prevent any reoccurrence of the current funding crisis.

What’s a 414(k) plan?  This isn’t a typo for 401(k) but a hybrid plan which is intended to have a mix of defined benefit and defined contribution (401k) features; however, even though it is defined in Internal Revenue Code Section 414(k) in the same manner as 401(k) plans are defined in that section of Code, such plans have never really come into use.  (Yes, I had to look this up; you can read more at this link.)

What’s a composite plan?  This is a proposal developed by the NCCMPfor another sort of hybrid plan, which is intended to provide for a greater degree of risk-sharing and risk-smoothing among participants, with more flexibility to adjust benefits as needed, to promote more reliable funding.  It’s modeled, in part, on similar plans in Europe, which themselves were a response to the decline in employers’ willingness or ability to take on the risk of sponsoring pension plans.

Now, all that being said, it is highly likely that whenever legislation does come out — whether it’s passed in a whirlwind like the 2014 reform act or debated as thoroughly as the SECURE Act — I’ll pick it apart and find all manner of things I disagree with, especially the degree to which federal cash is balanced by participant and employer sacrifices, but that’s in the nature of legislation, right?

And, again, what’s at stake here is not simply whether teamsters and miners have the pensions they expected to be awaiting them upon retirement, or whether ultimate cuts to their benefits are manageable or so harsh they can’t pay their bills.

To get back up on my soapbox (yes, once again), we, as a nation, and our politicians and leaders, cannot continue to long for the traditional defined benefit pension plan; that’s gone and it’s not coming back.  Instead, we need new ideas for ways to go beyond the divide between traditional pension and retirement savings account.  And right now, the prospect of fixing the multiemployer system and setting up a regulatory environment in which such plans can succeed in the future, as well as such plans as the fully-funded risk-sharing pension plan in place for Wisconsin public workers, are the best shot we have at defining a system, yes, however far into the future, which can offer all American workers a means of sharing risk in our retirement system.

Source: Forbes