Multiemployer funds, PBGC face hurdles with partition
By Hasel Bradford
July 13, 2015 - Pensions & Investments
Trustees of struggling multiemployer pension funds have a narrow
window of opportunity to do more than just cut benefits in order to survive, if
they can take advantage of the Pension Benefit Guaranty Corp. partition program
before the agency itself runs out of money, benefits experts said.
The Multiemployer Pension Reform Act of 2014, which allows
deeply underfunded plans to reduce benefits to avoid insolvency, also expanded
the PBGC's power to partition plans.
The old partition authority
was limited to helping plans in bankruptcy, and affected participants saw their
benefits cut to the PBGC levels for multiemployer plans, typically less than
$13,000 a year for 30 years of service.
Under the new partition
rules, the PBGC can take some of the benefit liabilities to help preserve the
solvency of a plan projected to run out of money within 20 years. The program
also allows plans to preserve benefit levels to 110% of PBGC-guaranteed amounts.
By one PBGC calculation, some 1.5 million participants are
covered by multiemployer plans expected to become insolvent by 2035. Benefit
reductions, also known as suspensions, could help preserve payments to 600,000
participants. Partitioning could keep payments above guaranteed minimums for
900,000 participants.
Overall, as many as 10% of 1,427
multiemployer defined benefit plans, with $431 billion in combined assets as of
2014, are likely to become insolvent, by PBGC and other estimates. gMost (of the
10%) are in plans that will require both suspension and partition,h said a PBGC
official who declined to be identified.
The most likely
candidates for partition are plans where benefit cuts alone won't be enough for
the plan to survive. But a partition — a process that allows multiemployer plans
to isolate a group of participants from a troubled employer and have the PBGC
provide financial assistance to a new successor plan, while keeping the original
plan intact — is considered a better option than dropping to the modest PBGC
guarantee level in the event of a plan termination.
In those
cases, the combination of benefit cuts with partition assistance gwould be
appealing,h said a multiemployer plan consultant who declined to be identified.
gClients are just starting to recognize it's a possibility. I think a lot of
plans will find their way there, but it will take a while. Partition is not that
obvious a choice,h he said.
Not ready to jump
Other consultants
say they have clients actively looking at partitioning, but not yet ready to
move forward.
Their reluctance is understandable. For starters,
a plan must have taken all reasonable measures to remain solvent, including
seeking Treasury Department approval to reduce benefits to 110% of the
PBGC-guarantee level, except for older or disabled participants. Until those
painful cuts are made, or at least applied for, the PBGC cannot step in and take
some of the liabilities.
Unlike the old partition program, which
just took financial responsibility for participants in orphaned plans and left a
healthy plan intact, plans must now cut benefits for all participants. gThat's
why we think some plans are going to be reluctant to do that,h said a second
PBGC official who also asked not to be identified.
gThat's a
very high hurdle,h said Stan Goldfarb, senior consulting actuary and managing
consultant of the Washington office of Horizon Actuarial Services LLC. For his
firm's 80-plus multiemployer clients, many of which are underfunded, git's hard
to construct a scenario where it would make any sense,h said Mr. Goldfarb.
Still, he said, gwe are looking at everything.h
It is also not
a simple — or inexpensive — calculation to figure out whether applying for
partitioning will be enough to save a plan. PBGC officials encourage trustees to
work with actuaries and legal experts to analyze the potential benefits and the
partition process, so trustees are on board before talking to the regulators.
gThe tension between the interests of, and protections afforded
to, various generations of participants, the differences in both plan benefit
levels (in relation to the PBGC guarantee) and funding outlook, as well as the
PBGC claim of having limited capacity for funding partitions, thus encouraging
plans to act sooner rather than later, make the analysis very complicated,h said
Eli Greenblum, senior vice president and actuary with The Segal Co. in
Washington.
Difficult communication
Explaining it to plan
participants could be equally daunting, especially along with benefit cuts.
gIt's going to be difficult to communicate those choices,h said the first PBGC
official.
Then there are the PBGC's own finances. Multiemployer
pension funds caused a record deficit for the agency in fiscal 2013, rising to
$42.4 billion from $8.3 billion the year before. An even more dour 2013
projections report gave the multiemployer program a ggreater than 50%h chance of
being insolvent by 2022, and a 90% chance by 2025.
As a result,
the agency must certify that helping a plan through partition won't hurt the
PBGC's ability to help other multiemployer plans.
gThat is
going to be one of the biggest hurdles,h said attorney Michael Kreps, a
principal with Groom Law Group in Washington who until last month was a top aide
on the Senate Committee on Health, Education, Labor and Pensions during passage
of the MPRA.
gCongress didn't give PBGC open-ended authority or
much in the way of additional resources,h said Mr. Kreps. gBecause of the
agency's fiscal outlook, the universe of plans the agency will be able to help
is limited, but trustees searching for ways to save their plans should
definitely consider whether the new partition rules are an option.h
When issuing the new partition rules in June, PBGC officials
estimated they could take on up to $60 million in payments and process up to six
applicants per year.
Informal chats
That $60 million gdoesn't
go very far. It's clear that we're not going to be able to provide assistance to
everyone that might want it,h the first official said. gHow much money we have
to use these tools will also depend on how many plans will actually use
partitions. Some may be able to save themselves, and that might release some of
our cash flow.h
Some potential partition candidates have already
asked the PBGC for assurance before they start the process, and PBGC officials
are encouraging plan executives to contact them informally. gWe are really open
to talking to plans about how the process would work before they apply,h the
official said. gThere are some that it will definitely help.h
Success with partitioning also could help the PBGC. Former
Director Joshua Gotbaum, now a resident scholar at the Brookings Institution in
Washington, said that even in the few previous applications, gpeople saw that
PBGC can save plans if it has the money to do so,h which could keep fewer plans
from becoming the PBGC's problem.
The most recent example, in
January 2014 when the PBGC partitioned off former Hostess Brands Inc.
participants from the Bakery and Sales Drivers Local 33 Industry Pension Fund in
Baltimore to keep it solvent, gabsolutely worked like a charm,h Mr. Gotbaum
said.
Under the new partition rules, gyou're moving up the part
when (PBGC has) to pay, but reducing the cost of saving plans. Partition can
save plans from running out of money at all. I think the combination of benefit
reduction and partition will save the multiemployer system.