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“A tale of two programs.” That’s how the Pension Benefit Guaranty Corporation’s operations for insuring pensions might be described.
The PBGC’s program for insuring single-employer pension plans saw its deficit cut nearly in half during the 2017 fiscal year. At the same time, the agency’s insurance program for unionized workers’ pensions is in a tailspin and the agency is looking for help from Congress in 2018. The agency reported a $65.1 billion program deficit in its latest annual report and projects that the program will likely be insolvent by late 2025 or earlier.
The pensions of more than a million employees and retirees in over 100 financially struggling plans would be at risk if the PBGC’s insurance program fails. It would also leave more than 10 million people without any backstop if their pension plan goes insolvent.
The agency is hoping that Congress will act in 2018 to address the plight of the PBGC as well as the plans in danger of becoming insolvent. Legislation to fix pensions has recently been introduced by Sen. Sherrod Brown (D-Ohio) and Rep. Richard Neal (D-Mass.), and other proposals are seeking congressional backers.
In late November, PBGC Director Tom Reeder told Congress that multiemployer plan premiums will need to be raised to about five times their current $28 per participant annual level to stave off the program’s insolvency. He also told lawmakers that separate action was needed to keep struggling plans from becoming insolvent.
But getting Congress to agree on legislation to help either the PBGC or the plans is challenging.
“Bipartisan legislation that could help financially struggling multiemployer plans stay afloat is politically radioactive for both Democrats and Republicans,” former PBGC Director Joshua Gotbaum told Bloomberg Law. That’s why such legislation isn’t likely to pass until after the 2018 mid-term congressional elections, said Gotbaum, who is now a guest scholar at the Brookings Institution in Washington. In an election year, Democratic lawmakers won’t want to be seen supporting benefit cuts to workers and Republicans won’t want to explain to constituents why they supported taxpayer funding for union plans, he said.
Gotbaum and others are also calling for changes to jump-start the Multiemployer Pension Reform Act 2014, which was intended to fix pensions by permitting certain financially struggling plans to suspend their accrued benefits for participants. Although MPRA hasn’t been as successful as intended—only four plans have received the Treasury Department’s nod to make cuts—2018 could see changes to the law that would smooth the way for more benefit cut approvals.
One vehicle for change could be a legislative proposal now in the works, Michael Scott, the executive director of the National Coordinating Committee for Multiemployer Plans, told Bloomberg Law. The NCCMP, which represents employers and unions, has been circulating a proposal to rescue the pensions system, he said.
The NCCMP’s proposal could even bring a solution to the teetering Central States, Southeast and Southwest Areas Pension Fund, which had its application to suspend participants’ benefits rejected by Treasury in 2016. The 400,000-member fund, which is projected to be insolvent by late 2024, accounts for between $15 billion to $17 billion, or about one-quarter of the PBGC’s deficit, which includes ongoing plans that the agency expects will exhaust their assets and need financial assistance within 10 years.
But not everyone believes that severe benefit cuts are needed to rescue plans from insolvency. Retiree groups, consumer organizations, and Democratic Party leadership support the Butch Lewis Act introduced by Brown, which purports to offer a solution without the need for benefit reductions.
The MPRA was passed after being attached to a must-pass omnibus bill. Some, including Scott and supporters of Brown’s bill, think that any new legislation designed to fix pensions could find a similar path and even be attached to a budget bill early in the year. The NCCMP lobbied on behalf of the MPRA, also known as the Kline-Miller Act.
The PBGC has two methods for raising funds that it can use to help dig itself out of its financial hole: investment gains on its assets and insurance premiums paid by the plans the agency covers. Congress has raised premiums in the past and could do so again.
“Congress is likely to raise premiums at some point, but not necessarily in 2018,” Gotbaum said.
NCCMP’s Scott says Congress shouldn’t jump too fast to raise PBGC premiums. “Before raising premiums, Congress should first determine how much of the PBGC’s deficit is unresolvable using the MPRA and the other solvency restoration tools that we are working on,” he said.
The agency’s deficit could certainly improve if Congress makes changes to the MPRA and if statutorily required premium increases kick in. “Wage inflation factors could increase annual premiums over the next 20 years” up to 37.5 percent, to an average of $38.50 per year, Scott said.
Another legislative proposal from the NCCMP that may be introduced in 2018 could also reduce the PBGC’s deficit. Under the proposal, healthy plans could elect to freeze their existing defined benefit plan and start a new “composite plan,” which is designed to meld the best features of defined benefit and defined contribution plans. The PBGC wouldn’t insure the composite plans.
“The longer the delay in making the changes needed to improve the solvency” of the multiemployer program, “the more disruptive and costly they will be for participants, plans, and employers,” Reeder told Bloomberg Law in an email.
Although the single-employer plan program appears to be healing financially, the agency continues to monitor plans covered by the program that are taking steps to transfer their pension risks through lump-sum payments to members or by leaving the system after purchasing annuities from insurers.
“There’s been a big uptick in pension annuity purchases” during the past two years and that trend is likely to continue in 2018, Peggy McDonald, senior vice president and chief actuary of Prudential Financial’s pension risk transfer group in Newark, N.J., told Bloomberg Law. On the other hand, with new Internal Revenue Service-mandated mortality tables kicking in on Jan. 1, 2018, limited-time lump-sum programs that have been popular for the last several years are likely to slow down, she said. The new tables incorporate longer life spans among workers and thus require sponsors to make higher payments.
The agency has been making a concerted effort to be responsive to single-employer plans. For example, in 2018 the PBGC will be fully implementing and evaluating a one-year pilot program for single-employer plans that was launched in October 2017.
The pilot offers sponsors voluntary mediation to resolve agency negotiations and disputes under the PBGC’s Early Warning and Risk Mitigation Program. The pilot will also be available to former sponsors seeking to resolve disputes over pension liabilities following the termination of underfunded plans. The Federal Mediation and Conciliation Service will be providing the independent mediators.
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