Multi Employer Pensions Part 4: Reform

*Note: This is part 4 of a mini series on multi employer pensions*

If you haven’t read any of the previous 3 posts on multi employer pensions the links are below and provide context for this post.

Multi employer pensions part 1

Multi employer pensions part 2

Multi employer pensions part 3

 

Alright; you’ve read about multi employer pensions, their pros and cons, the troubles, potential and almost certain demise (for some, anyway) and the picture looks bleak. Now, let’s focus on the buzzword reform – because that is precisely what is needed IF things are to even come close to being remotely salvaged.

The truth hurts. By now, I’ve painted a bleak picture of many multi employer pension plans and the underlying insurance for those plans, the Pension Benefit Guarantee Corporation (PBGC) is on the fast track to financial ruin as well. Millions who receive pensions on the multi employer side of the house WILL see substantial reductions IF reforms are not enacted. What’s more, many times, as with most compromises, if they are reached at all, tend to leave all parties involved dissatisfied. I suspect that, if reform is to be enacted, it will contain legislation which no one is happy about. The art of compromise, just as it is in marriage, strives for middle ground and everyone gives up something.

This, of course, is IF compromise is met at all. Past performance judged, things are often left unsettled, postponed for another time. The can is kicked down the road a little more towards that massive cliff – until it goes over; and go over it shall. That is my personal prediction when speaking on multi employer pension plan reform. There are options proposed, some more viable that others, but overall I believe inaction will arise – until it can’t wait a second longer.

Alas, I digressed. This post is for the reforms proposed and ultimately those beneficial for as many as possible. Now, with that caveat in mind, let’s look at some reforms on the table.

The Klien-Miller Multi employer Pension Reform Act of 2014

First up is a reform that has been enacted and is currently being applied – as trustees see fit and are allowed to use. In December 2014, President Obama signed this into existence. Effectively, critical and declining status pension plans can petition the treasury department to reduce obligations; that is, they ask to reduce the amount of money currently paid out to retirees. This is done in an attempt to keep the pension plan from going under.

This has garnered A LOT of hate and discontent from all sides. No one wants to be the one who receives less money nor those who vote to reduce retirees monthly benefit, many whom are personal friends. BUT, if those cuts are going to come anyway, (which is exactly what’s going to happen if those plans become insolvent) better the cuts come from ones you know than from those you don’t.

Now, I’ve made my displeasure over this reform known already: check out the other multi employer pension plan posts to see more in depth what I mean. I don’t intend to beat it up here, too. Instead, I merely list it because it most certainly is a reform. And in case you were wondering, below is a link to see which pension plans have applied to have pension payouts reduced, as well as their resulting status. Check this link out, here.

That was a retro reform; now for some which may be pending and/or discussed.

The Butch-Lewis Act

The Butch-Lewis Act is currently being discussed/debated for validity and potential use. This proposal, though, is not without its own issues. Essentially, the Butch-Lewis Act creates and allows low interest loan programs for pensions to borrow from and use those investment gains to help with the pension plan woes.

More directly, The Butch-Lewis Act creates an entity, the Pension Rehabilitation Administration, whose job is to provide loans to multi employer pension plans who are in financial trouble. Those loans are done via low interest, around 1%, and as proposed, they pay off interest for 29 years and year 30 they pay the loan balance off. The investment income, then, is vital to the success of this plan.

Those investment options are regulated – as they should be – considering it is the public treasury those funds are doled out from. There are some more technical issues at hand but summarily the investments are to be done prudently and not attempting a maximum return. Remember: maximum return = maximum risk. The aim, then, is to strive for a consistent investment gain. Just like the tortoise, slow and steady wins the race.

On the surface, this sounds good; it is a good thing to be responsible for the funds you were loaned and invest them responsibly. But, it muddies the water when you try to figure out how, in such a short amount of time, these pension plans are able to pay off the balances. If your pension plan is in need of $20 million that’s one thing; a multi billion dollar plan is another. Time and investment is needed – and by being prudent and responsible you essentially limit both.

I’m not going to get into the math of investments but suffice it to say, I am not hopeful of a historic market average rate of 7% for the next 30 years when the United States is on track to have unsustainable debt levels in 30 years.

I hate to say it but all I see is more debt piled on top of more debt and a delay in action. Don’t believe me? You can read in this particular act, the following language, verbatim, which you can find in Section 4: letter e:

“If a plan is unable to make any payment on a loan under this section when due, the Pension Rehabilitation Administration shall negotiate with the plan sponsor revised terms for repayment reflecting the plan’s ability to make payments, which may include installment payments over a reasonable period, and, if the Pension Rehabilitation Administration deems necessary to avoid any suspension o the accrued benefits of participants, forgiveness of a portion of the loan principal.”

You can look at it in the link, which takes you to Congress archives.

Others have written about this very act and provisions such as the one above are hard to interpret as anything but kicking the can down the road and ultimately end with “forgiveness;” a loan without repayment, as it were. True, many are writing with polemic and it is hard to argue against it when you read the above. But, there are others who have a more objective position and their voices bring with them some measure of introspection which we should not ignore.

Ideas and possibilities discussed/debated

Last year, members of the Joint Select Committee on Solvency of Multiemployer Pension Plans were tasked with gathering information and providing recommendations to the current crisis of under-funding multi employer pension plans face. The hearings rely on witness testimony from actuaries, retirement firms, the PBGC, as well as pensioners; all who have experience in dealing with and seeing those troubled waters ahead.

One of the working drafts the committee had, according to PI (Pensions&Investments), rejected the Butch-Lewis Act, which is a loan program at it’s core. Instead, they focused on, among other things, increasing the PBGC minimum guarantee levels, undoing benefit cuts which have already been enacted from the 2014 reform, and, most importantly, plans who are within five years of insolvency will see the cuts reduced to the absolute minimum level and then those plans will be terminated.

One attempt, then, is to strengthen the PBGC and let it do the job of partitioning; that is, allow it to take over for retirees whose employer they gained benefits from are no longer participants in the retirement plan. Employees who work for contributing employers keep on trucking while orphans, those whose employer no longer participates, are assumed by the PBGC – as designed.

Should the PBGC become insolvent, as projected in 2026, the tax cost will prove to be in the tens if not hundreds of billions of revenue lost – not to mention the cost of taking care of those retirees who now have diminished retirement funds. A cash strapped government obviously doesn’t want to see that play out.

Additionally, those multi employer plans which are healthy may end up facing undue trouble, with the committee’s idea of using a more conservative rate when plans measure liabilities. Between the more conservative rate proposed and the increase in premiums/guarantees, some experts warn otherwise healthy plans will be pushed and categorized as unhealthy, forced to adopt measures they don’t currently need. What’s more, those measures could even make some employers decide to get out of the game altogether, forcing the PBGC to adopt more individuals under partition, creating vicious cycles downward which continue on and on.

This link details what the committee proposed.

For my part, I like the idea of strengthening the PBGC so it can take in those orphans, whose employer no longer participates and allows the other active employers to take care of those they employ. This, in turn, reduces strain on the PBGC by taking care of the orphans and the pension plan is not burdened by paying for retirees whose employer no longer pays into the pension plan.

Honestly, I even like the more conservative figure proposed for figuring liabilities. I’m even a fan of reducing the investment gain assumption BUT at a steady rate that distributes it over many years so as not to affect stable pension plans. I mean, let’s put it on a personal level for a moment. What would each person do in the event this struck their individual family? While I am sure there are a number of variables, a constant should be a tightening of the belt (purse strings) and reorganizing of how we budget.
While I realize this is more of an apples to oranges approach, especially since we have not been able to manage these retirement accounts ourselves, it does bring the reality of the situation to the table; what’s done is done and we are left with the mess to clean up.

Something else it should highlight and that which I think it does poorly, is the extent of management for our retirement funds we currently have. I know scores of people who have little to no active role in their retirement funds and as we can certainly see from the pension crisis, promised money is, well, promised. It isn’t guaranteed, nor is it a certainty, no matter how we wish to view it. If the money isn’t there, it isn’t there, regardless of the reasons.

Now I am not advocating for a replacement of the pension system or it’s dissolution; rather, I think the prudent thing to do is act accordingly, especially considering the troubles we see pensions in. What that looks like for each family is different but the need to save for retirement is absolutely critical. Attempt, at all means, to control your future in this respect. Save until it hurts. Decide to not be a burden to your kids, so long as you have a say. Save, save, save. It most assuredly will not hurt to have saved too much for retirement when it’s upon you.

Before I am lambasted with hate mail because of this post, I wish to clarify I myself will be a recipient of a pension plan which is in critical and declining status and is projected to be in default status within the next 10 years. It is a relatively small plan, all things considered, but in the end it is headed down the road to insolvency.

Do I want to receive what I was promised? Yes, I would like it very much. I recall with joy how I used to talk about what the retirement benefits would be when the time came, the money I would receive, and the comfort level that it would afford me.

I can also recall the past several years as the pension plan woes have manifest themselves, detailing real, substantive problems and limited resources for trustees to tackle them. Reading this website and these posts should make it clear I am aware of what’s at stake for me and my family.

I am also aware of many other problems on the horizon and I do not wish to leave massive debt to my children – which is exactly what most of us seem to be willing to do by kicking the can down the road to a later date. Of course, the billions of dollars for multi employer pension plan reform or sustainability is a drop in the bucket to the MASSIVE national debt ($22 trillion, currently) but it is still debt upon more debt and makes me think long and hard as to what I am willing to deal with in order to leave less debt for my children to repay – debt which they didn’t accumulate but their parents and grandparents did. At that point, I have some serious decisions to make and I do not make them lightly, no matter the accusation.

Laying the blame at poor investment and over promised benefits is misleading at best and deceptive at worst; the problems are substantial, complex, and don’t fit the narrative someone wished to weave, and so they were excluded. Namely, by far the largest thing they leave out is the government’s complicit role in the over regulating of pension plans, tying the hands of the trustees, and inadvertently crippling many multi employer pension plans in the process. I’ve laid this accusation before but it warrants a repeat: when the government restricted pension plans from being over funded (100% +) and limited the % amount which could be invested in retirement accounts (at the time 25%) they did EXTREME and what seems like IRREVERSIBLE damage. That is, in my opinion, at the core of many difficulties we are dealing with now. Check out the other multi employer pension plan posts to read a more in depth issue of what I mean.

Initially, I had planned on writing maybe one or at most two posts on multi employer pension plans; instead, I have written four up to this point and there are more on the horizon as time and opportunities permit. Should you find yourself in a pension plan that is not only solvent but also strong be thankful because there are those, myself included, who are destined to draw little to none of the value which we were promised.

I wish I had the answers; really, I do. I do not envy those on the committees tasked with finding solutions, nor do I desire to be those who may ultimately find their retirement funds reduced (although, all things considered, trajectory says I will). Hopefully, we can all appreciate the terrible situation our pension system is in and the difficult decisions which lay ahead. As much as we can, we would do well to educate ourselves.

 

**Update 12/2019 – Recently, near the end of November, The Multi Employer Recapitalization and Reform Plan was introduced in the senate. It has some interesting goals and while I haven’t done in depth analysis, on the surface it looks better that the Butch – Lewis Act. You can check out a little more about the proposal from Forbes, and the link is right here.