In July, the Pension Benefit Guaranty Corporation (PBGC) issued an interim final rule laying out the requirements for troubled multiemployer plans to receive special financial assistance (SFA) provided by the American Rescue Plan Act (ARPA).
Since that time, there has been much chatter among experts about the rules, with many concerned that permissible investments for the funds will not earn the rate used for calculation of assistance payments, causing the SFA to be depleted before the 30 years it is intended to help plans pay out promised benefits. Consultants and advisers to multiemployer plans have already set about trying to determine how plans can manage SFA payments to make them work as intended.
Russell D. Kamp, managing director of Ryan ALM, says that while he has been “as much a critic of the PBGC’s interim final rule as anyone,” he believes the rules as currently stated for the SFA program will work. In a blog post, he says, “This SFA program can achieve success, but it very much depends on how the SFA and legacy assets are invested.”
In a separate blog post, titled “What Is Risk?” Kamp maintains that PBGC is right to not allow SFA payments to not be invested in risky assets. “The grant money … ‘shall be such amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment under this section and ending on the last day of the plan year ending in 2051, with no reduction in a participant’s or beneficiary’s accrued benefit as of such date of enactment.’ In other words, secure the promised benefits for a 30-year period—no games!” he says.
“How do you secure these benefits?” Kamp continues. “The PBGC and the legislation have stated that the SFA should be invested in investment-grade bonds as the means to ‘secure’ these promised benefits. Why bonds? They are the only financial instrument that has a known cash flow that can be used to meet the pension plan’s obligations. Any other asset class or financial instrument will create uncertainty as to their cash flows and/or terminal value.”
Benefits and human resources (HR) consulting firm Segal, on the other hand, says the permissible investments will result in many plans that accept SFA becoming insolvent sooner than the 2051 timeline. And Segal adds that it sees another issue with the PBGC’s interim final rule—many eligible plans will receive nothing.
David Brenner, national director of multiemployer consulting and senior vice president at Segal, says Segal estimates 68 plans potentially will not receive any SFA, out of the more than 200 that will be eligible to apply. According to an article on Segal’s website, a plan that is in critical status will be eligible for SFA if it meets certain other criteria—specifically, if its modified funded percentage is less than 40% and its active to inactive participant ratio is fewer than two to three.
“However, even if such a plan is eligible for SFA, it may find that the amount of SFA it will receive is zero,” the article says. “Under the PBGC methodology, if the discounted present value of a plan’s existing assets, future contributions and investment income are sufficient to cover the discounted present value of benefits and expenses through 2051, it will not receive any SFA but may still be deeply troubled. Examples include many critical-status plans that are projected to become insolvent after 2051.”
“There are plans that are not insolvent enough to qualify. It doesn’t make a lot of sense,” Brenner says.
He says the Multiemployer Pension Reform Act of 2014 (MPRA) was supposed to create a fix for insolvency by allowing plans to decrease benefits, but that became a political issue for many. Now, the SFA is seeking to undo that solution. He says it puts multiemployer plan trustees in a dilemma because they fixed their solvency problem by reducing benefits. But now they are being told if they reverse that and restore those benefits, they will be eligible for SFA—but that will bring back their solvency problem.
In his blog post, Kamp notes that 18 plans have already seen benefit reductions under the MPRA. He argues that plan participants “want the promise that was made to them to be returned and secured for the next 30 years.”
However, Brenner says, “Participants could sue [a plan’s trustees] if they don’t apply for SFA, but they could also sue if the trustees do apply and plan becomes insolvent again.”
But he notes that “these are interim final rules,” and so far the PBGC has received 103 comments. Brenner says comments from the National Coordinating Committee for Multiemployer Plans (NCCMP) and some U.S. senators suggest that the interim final rule is not consistent with legislative intent. Stakeholders are waiting to see whether the comments will lead to changes in a PBGC final rule.
A Temporary Fix
Brenner says there are some challenges that need to be looked at after the issues with the SFA rules are solved.
“We have to give the PBGC credit. Ten months ago the thought that it would be some multiple of billions of dollars was doubtful. What it did was remarkable in the amount of time it did it, but the devil is in the details,” he says. “Everyone agrees that the intention of this is a temporary fix, but one could argue this is kicking the can down the road. What people forget is DB plans don’t have a 30-year horizon. They have to pay out benefits for many more decades; from the time a person spends in retirement through the time spent paying out the person’s beneficiary, we could be looking at 70 years. This is a patch on a tear that will come back, and we have to figure out long-term solutions.”
Brenner notes that some stakeholders would argue that their DB plans are perfect and well-funded and that there’s no need to open the door to change because they are working. But there are others that say they want more flexibility. These stakeholders are looking at what is driving costs, and investment risk is a main driver, he says. Some say investment risk should be taken off plan sponsors and they should be able to move to variable benefit plans where they can lower benefits based on how the market is doing.
For employers that want to withdraw from multiemployer plans, the way the rules are currently structured—using very low discount rates in calculations of what withdrawing employers owe—results in high liability payments, Brenner says. He notes that many stakeholders feel those rules are a barrier to new employers joining a multiemployer plan. Brenner says lawmakers need to consider whether the withdrawal liability rules continue to make sense.
In addition, PBGC premiums for smaller plans can become a significant expense and potentially limit their ability to increase benefits for participants, says Brenner.
“The current administration has tried to offer a stop gap for an existing problem, and PBGC needs to be commended for the timing of the interim final rule,” Brenner says. “But they need to make the right decisions, and quickly, for the final rule. Boards of trustees are looking at the guidance now and they need to make decisions now, so they need final rules as quickly as possible.”
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