Perspective On Congress Discussing Pension Cutback Legislation

[Andy the Actuary]

From St. Louis Post-Dispatch.

While PBGC is mentioned, IMHO this is truly about Congress attempting to save the PBGC from bailout.

Bill McClellan_ Pulling the rug from under retirees _ 12-21-2014.pdf

[tymesup]

The Teamsters made a promise to Bob. They should keep it.

The PBGC made a promise to the Teamsters and Bob. They should keep it.

[david rigby]

When the PBGC makes a promise, they are using other people's money. The process is broken.

[Effen]

Interesting watching the headline writers come up with flash - the Wash Post headline was something like Congress Cuts Pensions for Women.

Its just a sad reality. Yes, promises were made all around that just can't be kept. Unfortunately, the money just isn't there. Why isn't it there? Plenty of blame on that one - Trustees, Employers, actuaries, accountants, financial advisers - but the industry is shrinking so they can't shovel all that obligation on to the current actives, or the taxpayers.

If the Teamsters aren't able to reduce benefits, the plan will collapse and bring the PBGC with it. So, yes, its a bad deal, but at least it is something. Would you rather have 40% of what you expected, or 0%?

[ESOP Guy]

I think that article would be a bit more complete if it gave the funded ratio of the Central States Plan. I seem to recall it is <30%.

So people like tymsup can say a promise was made it needs to be kept but math is a terrible task master and if the money is not there it isn't there.

It isn't like this problem sneaks up on people. An under funding like that fund has wasn't just because of the market drop of 2008. That happens because the two side of the collective bargaining table agreed to not put enough money into the plan decade after decade. They kicked the can down the road and now they are so far down that road there is no going back. You can't just say let's kick in a little more of the active members pay and it will all work out.

Are workers like Bob in many ways victims-- sure but the money isn't there. To me their union and employers betrayed them and I wish there was a way to make life more fair but it isn't.

[tymesup]

Have the Teamsters acknowledged they can't keep their promise? Has the PBGC?

Has Washington acknowledged they set up a flawed agency? One that may have encouraged the Teamsters to underfund the plan?

Is it appropriate for Washington to pick winners and losers in this situation?

[Effen]

Have the Teamsters acknowledged they can't keep their promise? Has the PBGC?

Yes and Yes. That is why the new legislation was created and passed

Has Washington acknowledged they set up a flawed agency? One that may have encouraged the Teamsters to underfund the plan?

How was it flawed? Do they ever admit their agencies are flawed? Maybe you can argue it wasn't properly updated since its creation in 1980, but Congress and the House control the laws. If you want to pass blame - look at our elected officials who refuse to adopt a national retirement policy and are afraid to make difficult choices to preserve the system.

Maybe this is a "new" problem to some of you, but it has been well known and documented for many years.

[Andy the Actuary]

Personal take is pension law has had holes since the conception of multi-employer plans. For example, underfunded plans (whatever that means!) should not have been permit to negotiate past-service benefits. So, for example, if you had a multiplier of $10 / year / service and the Plan was underfunded, then the benefit multiplier could be increased to $12 only for future service. I.e., do not allow an underfunded plan to create windfall benefits.

[Effen]

Agreed, but IMHO the real problem was the old full funding limit. Very often the negotiated contribution would exceed the FFL (which was purposely low to force employers to put in less and thereby pay higher taxes). Therefore, funds had to increase past service benefits in order to preserve the employer deduction. We both agree that past service increases were a significant contributor to the problem.

I will blame "bad law" for requiring well funded plans to increase benefits and not permit them to build up a cushion. It is worth noting that this provision was changed and the old FFL is no longer a problem.

This is similar to the excise tax on reversions on the single employer side. I believe many employers would be willing to overfund their plans if they could get the money out if it wasn't needed. But again, Congress lacks the fortitude to change the law because they are afraid of the same stupid headlines we are now reading. So they just complain that employers are not properly funding their plans, but refuse to give them any viable tools to work with.

[Andy the Actuary]

Effen, in 1970s was involved with a couple takeovers where sole purpose was to close company and recapture pension reversion. At that time, Excise tax was 10% and no 417(e). Thriving companies were killed and employees lost jobs owing to greed.

[mbozek]

It was the acquisition of A& P in the late 70's that woke up CFOs to the opportunity to take over a company solely to acquire the surplus plan assets and terminate the plan. A & P had a pension plan which had 250M in surplus assets when a foreign Co acquired it, terminated the plan and pocketed the $250M. After that every CFO wanted overfunded DB plans to capture the surplus assets. Congress changed the law to add the 50% excise tax.

[Andy the Actuary]

The 4980 tax was originally 10%. In 1989, it was increased to 15%. Then, in 1990, it became 50%. However, we note that if 25% is transferred to a replacement plan, it reduces to 20% and 20% of (100%-25%) = 15%.

[MoJo]

When the PBGC makes a promise, they are using other people's money. The process is broken.

Really? The PBGC is funded with premium dollars - as a captive insurance company. Would you say the same about claims paid by Aetna? Humana? Nationwide?

The process isn't broken - the premiums haven't kept up with the risks - and those who take greater risks are not penalized accordingly.

[My 2 cents]

The Teamsters made a promise to Bob. They should keep it.

The PBGC made a promise to the Teamsters and Bob. They should keep it.

Personal opinions:

Isn't the PBGC's promise to Bob commensurate with the reduced amount he might receive from the Central States fund? The guaranteed benefit for a multiemployer plan is dramatically lower than the corresponding amount for a single-employer plan. So how is the PBGC failing to keep its promises? The PBGC never promised to protect that much of Bob's pension of $36,000 per year.

Which is not to say that we have not come to a sad state of affairs, when career workers like Bob are left in the lurch. What would have happened had the laws been changed 25 years ago to force better funding of multiemployer plans (or at least to prohibit any benefit improvements when the funding was not there to support them like they now do for single employer plans)?

Not to mention the fact that the funding reforms and the premium increases that are supposed to shore up the PBGC are never applicable to the kinds of plans that cause the PBGC's problems (think of airline and steel companies spared the full brunt of upgraded minimum funding rules back in the 1980's into the 1990's, and the fact that the PBGC premiums for multiemployer plans have been pretty much left alone forever while the single-employer plan sponsors, whose plans have been forced over the past few years into a more secure funded position under PPA, are the ones whose premiums are being more or less tripled).

I keep forgetting that any kind of forced increases in contributions to enhance benefit security are considered to threaten jobs (and when are jobs ever sufficiently secure to handle pressure of that sort?). Also, how is this so much worse than forced retrenchments in promised benefits under governmental pension plans (which does not seem to be garnering that much outrage from the taxpayers supporting those plans)?

Seems to be a lot of oxen getting gored here. Happy 40th anniversary of ERISA!

Here's hoping that the next 40 years work out a bit better.

[Andy the Actuary]

Dear Mr. 2 cents:

Not that familiar with when the PBGC takes over in respect of a ME plan but doesn't the PBGC first protect benefits in a pay status and start cutting actives, TVs, etc? I.e., doesn't it establish asset allocation priority categories? In such case, there may be enough money to cover retirees whose benefits have been in a pay status for 60 months.

Wouldn't the new law permit trustees to cut retiree pension's first?

[My 2 cents]

I may be wrong (not too familiar with the workings of the PBGC's multiemployer program), but I don't think that the PBGC has a formal commitment with respect to protecting the full amount in pay status when it takes over a very underfunded ME plan. Do they still do that for single employer plans? A benefit is guaranteed or not, and (I think) the PBGC would cover nothing under a severely underfunded failing multiemployer plan that is not guaranteed and would cover all that is guaranteed, without regard to priority categories.

The PBGC guarantee under a multiemployer plan would be limited to something like $35 per year of service (i.e., the aforementioned Bob would get something like $17,000 if the plan failed and he had to look to the PBGC for benefits for his 40 years of service).

I have not looked at the new law yet, but (except for the same reason Willie Sutton gave for why he robbed banks*) how much sense would it make to deprive the retirees of their ongoing payments as a first resort and not as a last resort? Does the law actually permit the trustees to cut immediate payments to retirees first?

*Because that is where the money is. If you cut payments to people retiring in 20 years (which is how they reduce Social Security benefits in response to projected shortfalls) but keep making full payments to all of those already retired, how will that keep the multiemployer plan from running out of money in the next 5-10 years?

[Andy the Actuary]

While what you say may be correct, it would not make sense. For example, Plan has $2 billion in assets and $3 biillon in total liabilities, and the guaranteed benefits liability is $1.5 billion. What you're suggesting is that PBGC takes over and gets 1/2 billion windfall. Wouldn't they apply the excess 1/2 billion since it does not extend their liability.

Let me just say that I have been practicing in pension since pre-ERISA and have never experienced the displeasure of being involved with a PBGC takeover.

Anyway, here's the blurb from that wonderful document known as the Annual Funding Notice (Single Employer):

"In some circumstances, participants and beneficiaries still may receive some benefits that are not guaranteed. This depends on how much money the terminated plan has and how much the PBGC recovers from employers for plan underfunding." While I cannot assure this is correct, presumably the PBGC would apply asset allocation categories if assets exceed the pv of guaranteed benefits.

Can some please help?

[My 2 cents]

Not being that familiar with the way the multiemployer plans are handled by the PBGC, I agree that if there is more than enough money to cover the guaranteed benefits, some sort of prioritization is in order to use the assets to provide non-guaranteed benefits. For example, I would expect the PBGC to apply at least some of those assets to cover at least some of the current benefit payments in excess of the guaranteed amount.

If we are talking about the Central States fund, however, I would imagine that at something like a 30% funded ratio, there would not be enough there to cover even the guaranteed benefits.

Again,not being that familiar with the PBGC's coverage of ME plans, I would imagine that the PBGC is unable to require the participating employers to kick in any additional money to help defray the cost of providing even the guaranteed benefits when a ME plan fails (which they can do for single employer plans). A failing ME plan can assess withdrawal liability against a departing employer but it is doubtful that any such process arises when the plan as a whole is taken over by the PBGC. No going after solvent members of a participating employer's controlled group, no claim against the assets of participating employers, none of the actions the PBGC can take when a single employer plan is taken over. It's just the PBGC and whatever remains of the plan assets (isn't it?).

[Peter Gulia]

Beyond what one thinks about the public policy of what Congress enacted, it might soon be time for some actuaries to think about how the new law relates to professional considerations.

Among the many conditions that must be met to invoke a cutback regime, the plan's actuary must have certified the sufficient looming insolvency as provided by the statute.

Perhaps trustees disappointed by an absence of a certification they desire might go shopping for a new actuary. Or retirees whose benefits are lowered under a cutback might pursue malpractice and other claims. Even winning a motion to dismiss can be expensive.

And what should the professional societies think about granting a professional so much practical control over her client's fates?

[Effen]

Fiduciary Counsel - Actuaries, with input from the Trustees, already exhibit professional control of the plan's funding status. With required 10-20 year projections already required, a small tweak in the expected rate of return can produce significant swings in the funding status. Could a fund that is projected to be 35% funded in 25 years decide it would rather be insolvent? Sure, and the actuary might be able to make a small adjustment to get it there.

BUT, actuaries have Standards of Practice to comply with. If our assumption set is not in compliance with the ASOPs, we can be sanctioned or even loose our ability to practice. Is there a potential for some "bad" actuaries to push too hard? Probably - people are people, we have bad doctors, bad lawyers, bad accountants - why not bad actuaries? But, the Academy and the ABCD, and the SOA, and ASPPA, and all the professional organizations are trying to keep it in check.

2 Cents & Andy - the PBGC does not come into a ME situation until the fund is completely insolvent. Once it runs out of money, ALL benefits are slashed to PBGC minimums and the PBGC begins "loaning" money to the fund to cover the benefit payments. Everything else stays in place - contracts are negotiated and employers keep contributing. There are no priority categories like the single employer side.

The new law will give funds the ability to stall insolvency by reducing benefits. If the fund is going to run out of money, why wait until it completely runs out of money to start reducing payments?

[Andy the Actuary]

The new law will give funds the ability to stall insolvency by reducing benefits. If the fund is going to run out of money, why wait until it completely runs out of money to start reducing payments?

Dilemma time. If you protect the retirees, then you must take away from the TVs and more importantly, the actives. If you take away from the actives, how do you justify the contribution rates for lower benefits? Of course, we're waiting for the lawsuits not from the employees but from the employers who contributed for a certain level of benefits. Where's their refund since in their minds they contributed for benefits that won't happen?

There's a big difference between funds being exhausted and Trustees making judgment calls to hurt certain population sectors.

It's at times like these that I reflect fondly on having watched Stan Musial win his last batting title in 1957 and thank somebody for keeping me from practicing in the m.e. sector.

[Peter Gulia]

Effen, in my experience, actuaries are rather good at resisting pressures; my rhetorical point is that it's a shame that they need to.

It's so that actuaries have had significant practical control concerning a pension plan's funding. But that degree of practical control concerning a participant's rights wasn't nearly as much as what this new cutback regime allows.

Even working within the professional standards, there are plenty of opportunities for an actuary to exercise professional discretion. So is it fair to ask an actuary to impliedly decide whether a pension plan does or doesn't get a cutback regime?

I just think it's very unfair what Congress has asked of actuaries.

[Effen]

What other options would you have suggested?

These proposals primarily came from the NCCMP and therefore were at least somewhat the result of joint concessions from employers and unions. I agree that it is a tragic situation, but unfortunately, the tragedy occurred.

There were other proposals dealing with the future that were not moved forward. Those include new plan designs that would eliminate withdrawal liability and creating a self-correcting benefit based on investment returns so we don't have this problem in the future.

[Peter Gulia]

Leaving aside the public policy about the cutback regime itself, my concern is about dumping on the plan's actuary an unwelcome responsibility of serving as a partial arbiter of whether to invoke a pre-insolvency restructuring.

The new law allows the multiemployer plan's trustees to invoke cutbacks not because the plan is insolvent, but rather because an actuary predicts it is probable that the plan will become insolvent at a future time up to 20 years hence. Because a consequence of that professional finding can allow a plan to impose an insolvency restructuring before the insolvency happens, the actuary faces an awesome responsibility.

Unlike many employee-benefits lawyers, I sometimes serve as a plan's fiduciary, with all of the legal and moral responsibilities involved. I am not afraid of that responsibility when I deliberately choose to take it on. But I would feel put upon if responsibility of that kind was attached to my normal work as a mere lawyer.

Even using the idea of a pre-insolvency restructuring as a way to manage a multiemployer plan's mismatch of assets and obligations, Congress could have designed a different trigger. For example, the plan's trustees who find that a restructuring is needed could petition a court. A judge can consider other evidence, including reports from competing experts, and from experts independent of those who have a stake in the proceeding. The experts might include not only actuaries but also economists. Yes, the decision-making might be a little slower; but the cost might be worthwhile to help make sure society makes a sound decision that a restructuring is necessary. At least, the plan's actuary might be comforted by knowing that it is not her estimate alone that allows the plan to cut pensions.

Or maybe I have it all wrong; maybe an actuary is accustomed to the weight of the world.

[Effen]

All good points, but as an actuary, I would prefer that actuaries were responsible and not lawyers or judges.

I see your point that it does put a lot of pressure on the plan's actuary, so maybe they could have created a panel of actuaries who would serve as an impartial arbitrator. Sort of like an Oversight Board make up of 3 or 5 actuaries to spot check/peer review the projections before a cutback is approved. Maybe as the law develops, we might see this kind of oversight.

[Peter Gulia]

In the U.S. Treasury Secretary's denial of Central States Pension Fund's application to allow benefit suspensions, special master Kenneth Feinberg cited some actuarial practice standards, and found weaknesses in some of the application's assumptions.

https://www.treasury.gov/services/Responses2/Central%20States%20Notification%20Letter.pdf

[My 2 cents]

This is speculation, but I suspect that a big part of the problem is that neither the employer side nor the union side had enough motivation to worry about long term consequences of negotiating benefit enhancements over the years, perhaps thinking that if worst came to worst, the inability of the funds to cover benefits would be resolved through some sort of bailout. Now try to imagine what it would take to get the smallest bit of bailout legislation through Congress these days, especially for union plans. Does anyone think that Congress would agree to any kind of bailout for Social Security disability benefits (for example), even though the general population probably is sympathetic to people who are disabled? How much sympathy can one expect these days for union (or government) employees and retirees? Imagine what would happen if Congress tried to fund a bailout for governmental or union pension plan members by raising the income tax rate by even 1%? Only those tired of serving in the House or Senate would give any thought to voting for such a proposal.

[Effen]

Thanks for posting. That was really fascinating reading. I know this is only one very large situation, but it was interesting to see how Treasury examined, and ultimately rejected, some of the critical actuarial assumptions as unreasonable.

I think all who practice in the multi-employer space need to take note when Treasury says things like the 7.5% investment assumption does "not satisfy the requirement that assumptions have no bias ...The assumptions are significantly optimistic, as evidenced by the available relevant investment return forecast data in the Horizon Survey ... the Plan cites as supportive of the reasonableness of its investment return assumptions"

I don't know what their investment mix was, but I do know 7.5% is a very common assumption in the multi-employer world.

[ESOP Guy]

Not an expert in this field at all. The DC side is my side of things. But I have worked for plenty of firms that have a DB practice so I like to think I understand the basic concepts.

As I read the rejection does it seem like they almost are implying they should come back with deeper cuts?

A big part of the rejection does seem to say the interest rate assumption is too high (other assumptions are flawed also) and they think the fund will go insolvent even after these cuts.

That would seem to say make larger cuts and come back.

Sure they added the notices weren't written plainly but that can be solved also.

Nothing in the rejection seems to say this can't be done.

I say this because at least some of the popular media is saying this is a victory for the retirees. As I read it this might be a Pyrrhic victory for the retirees.

[Peter Gulia]

Effen, what do you think about the letter's explanation that assuming one average entry age is not sufficiently sensitive to the purpose of the evaluation?

ESOP Guy, although lowering pensions might conserve some cash flow, even the maximum benefit suspensions that can be allowed might not lead to a projection that the plan would return to the degree of normalcy that the Multiemployer Pension Reform Act of 2014 requires as a condition for approving a benefit suspension.

The challenge for the Central States Pension Fund is to discern whether there is any configuration of benefits, contributions, and withdrawal liability that would avoid the plan's insolvency.

[ESOP Guy]

ESOP Guy, although lowering pensions might conserve some cash flow, even the maximum benefit suspensions that can be allowed might not lead to a projection that the plan would return to the degree of normalcy that the Multiemployer Pension Reform Act of 2014 requires as a condition for approving a benefit suspension.

The challenge for the Central States Pension Fund is to discern whether there is any configuration of benefits, contributions, and withdrawal liability that would avoid the plan's insolvency.

I guess that reality hadn't come to mind. Is the plan so far gone it can't saved at all without a bailout.

[Effen]

Fiduciary - yes, I found that interesting as well. It was almost like Treasury was saying their assumption set wasn't sophisticated enough, which I find a little surprising, considering who worked on it and the size of the submission.

I certainly don't think this is over, and I agree the media is misreporting (are we surprised?) The Teamsters helped write this law so I would look for some Congressional pressure on Mr. Feinberg to look for possible solutions. What the members don't understand is that if they don't reduce benefits, they will most likely end up with no benefits. Maybe they are banking on Bernie winning the election.

I except this was just round one. The Teamsters will come back with a new assumption set, and likely deeper cuts, but it is also a real possibility they can't make cuts deep enough and the fund will just fail.