While the act would enable the plans to continue paying full benefits for an average of 16 years beyond what would be possible without a loan and would significantly reduce pressure on the Pension Benefit Guaranty Corp. (PBGC), The Pension Analytics Group says, it would only temporarily mark the deficits, as opposed to reduce them. “Eventually, taxpayers and the PBGC will face losses associated with the program in the form of Treasury paid-for loan defaults and PBGC assistance payments.”
The Butch Lewis Act would permit loan maturities of 30 years and require plans to invest in low-risk portfolios to hedge their short and medium-term pension liabilities, rather than risky assets. While the act would permit loans to be repaid in 30 years, The Pension Analytics Group says the act would only reduce plans’ insolvency by 16 years because the plans would burn through their assets in that timeframe.
Using 500 stochastic trials, The Pension Analytics Group projects that if no measures are taken to protect multiemployer pension plans, 3.2 million participants will be affected in plans that become insolvent. The Butch Lewis Act would reduce this to 2.3 million participants—still a significant number.
The Pension Analytics Group estimates that the Butch Lewis Act would reduce the present value of PBGC’s $95 billion in assistance to $33 billion, a reduction by $62 billion. However, the Treasury experiences an average of $43 billion in losses due to loan defaults.
In conclusion, The Pension Analytics Group says that the only option to prevent insolvency of multiemployer pension plans is to implement deep benefit cuts across both young and old plan participants alike. The group estimates that only 10% of the weakest 231 plans are legally permitted to cut benefits. Thus, the organization suggests that the Multiemployer Pension Reform Act of 2014 be amended to permit a greater number of the plans to reduce benefits—and possibly make the cuts a requirement.
“Benefit cuts are painful, but for many weak plans, they are already inevitable,” The Pension Analytics Group says. “It is a merely a question of the timing and size of the cuts. Either an across-the-board benefit cut of between 10% and 30% needs to be implemented right now, or the plans will eventually become insolvent, at which point beneficiaries may receive only cents on the dollar of their accrued benefits.”
« Retirement Industry People Moves