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Old 03-10-2019, 08:43 AM
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https://www.plansponsor.com/multiemp...estment-model/
Quote:
Multiemployer Pension Plans Need Financial Help or a New Investment Model
In a hearing, lawmakers heard about how the multiemployer pension plan crisis is affecting employers, employees and the economy today, why current legislation contributes to the crisis, and suggestions for moving forward.


Spoiler:
Urgency was a common theme among those providing testimony to the House of Representatives’ Education and Labor Committee Subcommittee on Health, Education, Labor, and Pensions about the multiemployer pension plan crisis.

While several hearing witnesses pointed out that, at present, only about 10% of multiemployer plans are projected to become insolvent within the next 20 years, they testified that issues facing all multiemployer pension plans are creating problems for employers and the economy as a whole today. For example, Mary Moorkamp, the chief legal and external affairs officer at retail grocery chain Schnuck Markets, Inc., noted that since it entered the Central States Teamsters Pension Fund in 1958 it has funded its weekly contributions to the Central States plan, but despite taking its responsibility seriously for providing retirement benefits to its employees, it is now facing adverse effects to its business and to those benefits that were promised to employees. Moorkamp pointed out that in 1958 and for many years afterward, there were no withdrawal liability rules, tax deduction limitations on multiemployer plan funding or a Pension Benefit Guaranty Corporation (PBGC) to which multiemployer plans had to make premium payments.

Now, Schnuck Markets is making contributions to the Central States plan for the benefit of employees that never worked for the grocer to support “orphaned” retirees from employers that withdrew from the multiemployer plan. In addition, given Central States projected insolvency along with the potential insolvency of the PBGC’s multiemployer plan insurance program, Schnuck retirees could receive less than half of what they were promised.

Moorkamp shared ways the multiemployer crisis is affecting its business currently, noting that by its calculations, each new Central States participant increases its withdrawal liability amount by approximately $268,000:

“Reluctance to expand into new markets. If we open a store in a new market, we would have to hire drivers to transport product to these stores. If the driver is covered by our Collective Bargaining Agreement with the Teamsters, that Teamster driver must become a participant in Central States. This adds to our Central States contribution base, which increases our withdrawal liability.
“Significant cost associated with growth in current markets. In a recent transaction involving the acquisition of a number of retail grocery stores in our market, we immediately rejected an overture to purchase the seller’s logistic operations that had employees in Central States. As the seller could not find any buyer, the seller closed these logistic operations.
“Recruiting and retention problems. The Central States crisis has created recruiting issues for Schnuck Markets. Oftentimes, when we inform a prospective Teamster driver that his or her pension will come from Central States, they lose interest in the position.
“We rely on private placement debt and bank lines of credit to augment our cash flow. As Central States positions itself for insolvency, our lenders are becoming increasingly concerned about the impact of the insolvency on our financial statements. When assessing a company’s financial strength, lenders and credit rating agencies factor potential pension withdrawal liabilities into their analysis, which affects our credit profile and our cost of capital.”
Because of the uncertainty of pensions for its employees, Schnuck adopted a 401(k) plan.

Glenn Spencer, senior vice president at the U.S. Chamber of Commerce, cited these as issues all employers participating in multiemployer plans are facing.

James Morgan, a retiree from Hostess Brands’ Wonder Bread, shared his story. Hostess filed for bankruptcy in 2012, and later that year, announced it was withdrawing from the 42 multiple employer pension plans in which it participated. According to Morgan, in August 2011, the CEO of Hostess Brands sent a letter to every employee saying that the company was suspending the contributions it was obligated to make to the Bakery and Confectionery Union and Industry International Pension Fund (B&C Pension Fund) according to its collective bargaining agreement. The CEO said the suspension of contributions was going to be “temporary,” but the company never resumed making payments to the Fund.

Morgan said the future of pension benefits has been hanging over the heads of him and his former co-workers for years. If they are lost or cut, many could not afford to pay bills or take care of necessary medical needs. He told the committee that his union, and the pension fund, support the Rehabilitation for Multiemployer Pensions Act, which would create an entirely new agency within the Department of the Treasury authorized to issue bonds in order to finance loans to “critical and declining” status multiemployer pension plans, plans that have suspended benefits, and some recently insolvent plans currently receiving financial assistance from the PBGC.

Unintended consequences of legislation
Several hearing witnesses blamed the multiemployer pension plan crisis on rules placed on these plans. For example, Josh Shapiro, vice president, Pension, American Academy of Actuaries, pointed out that the 1990s produced very large investment gains in the financial markets, which put many multiemployer plans into an overfunded position. Tax laws that made contributions to overfunded plans non-deductible to the employers caused many plans to significantly raise benefit levels over a short period of time. These benefits could not be taken away, so subsequent losses in the financial markets created large funding deficits.

Dr. Charles Blahous, J. Fish and Lillian F. Smith chair and senior research strategist at the Mercatus Center at George Mason University, told lawmakers that while market downturns and changing demographics in multiemployer pension plans—more retirees than active employees—have contributed to the underfunding crisis, “prudent pension management would anticipate them and, in any case, they do not account for the weakness of the multiemployer pension system relative to the single-employer insurance system which, though facing those same stress factors, is in a much stronger financial position.”

According to Blahous, the Pension Protection Act (PPA) bolstered the funding and premium requirements for single-employer pension plans, but it did not apply similar reforms to the multiemployer pension system. He said, “Relative to single-employer pensions, the multiemployer pension system suffers from a lax regime of funding rules, fostering inaccurate valuations of pension liabilities and assets, inadequate contribution requirements for continuing and withdrawing sponsors alike, and inadequate and poorly-designed premium assessments.”

Blahous told lawmakers that multiemployer plans are allowed to greatly understate their liabilities by using inflated discount rates to translate them into present-value terms. “A payment that is fully guaranteed and risk-free should be discounted at a Treasury bond rate, whereas pension obligations generally should be discounted at rates not exceeding those reflected in a yield curve of corporate bond rates. These principles, however, are widely violated; multiemployer pension sponsors routinely discount their obligations at rates of 7% or more, causing plan funding percentages that average less than 50% in reality to be misreported as being nearly 80%. The problem is a simple one: if pension liabilities aren’t properly recognized, they won’t be funded,” he said. Blahous added that multiemployer plans are given much longer time frames to address their underfunding, and critically underfunded plans are exempted from otherwise applicable statutory penalties for inadequate contributions. “Accurate measurement of pension liabilities and assets is the essential, irreplaceable component of multiemployer pension reform. It’s highly unlikely that any solution will hold if this is not done,” he said.

Blahous also noted that average insurance premiums paid to the PBGC by multiemployer plans are less than one-sixth of what they are for single-employer plans, despite the large multiemployer insurance program deficit. Underfunded multiemployer plans are also not subject to variable rate premiums as underfunded single-employer plans are, which means that the PBGC cannot charge sponsors of underfunded plans for the additional risks they pose to the insurance system.

In her testimony, Mariah Becker, director of research and education at the National Coordinating Committee for Multiemployer Plans (NCCMP), also pointed to withdrawal liability rules and laws that made contributions to overfunded plans non-deductible to the employers as contributors to the multiemployer pension plan crisis. She added that rejection by the Treasury of benefit reductions for certain plans, such as Central States, will have negative consequences for all stakeholders.

“For critical and declining status plans, every year that goes by without a real solution results in negative cash flow, which reduces the plan’s assets, and moves the plan closer to insolvency. This rejection also impacted the finances of the PBGC and its multiemployer program. Had the Central States Pension Fund’s [Multiemployer Pension Reform Act] MPRA application been approved, approximately $20 billion of the PBGC’s deficit would have been eliminated,” she said.

The path ahead for multiemployer plans
Dr. James Naughton, assistant professor of accounting information and management at the Kellogg School of Management at Northwestern University, said lawmakers have the task of figuring out what to do about the current underfunding and potential insolvency of multiemployer plans as well as the PBGC multiemployer plan program, as well as the task of figuring out how to ensure that the current level of underfunding does not deteriorate further and how to put the system on a sustainable path going forward. “These two decisions require different solutions, and trying to solve both at the same time creates unnecessary difficulty. In my opinion, the more pressing decision is the second one, as that decision offers the hope of limiting any further deterioration of the multiemployer system,” he said.

According to Naughton, multiemployer plans have not collected actuarially sound contributions and have invested the contributions they received aggressively. The solution he offered: “If these plans had chosen to collect actuarially sound contributions and purchase annuity contracts (or mimic the investing philosophy of life insurance companies), there would be no crisis. Participants would be receiving or would be scheduled to receive the annuity benefits purchased with the contributions made on their behalf. No industry deregulation or competitive events would change this outcome.”

He added, “I believe it is critically important that any framework for addressing the multiemployer pension plan crisis incorporate the notion that insurance companies are experts at providing fixed annuity benefits, and that their general approach should be adapted for the multiemployer pension plan system.”

Naughton said he’s not aware of any convincing reason why multiemployer plans should invest primarily in the stock market. “They do not have the ability to respond to large fluctuations in the value of the assets in the pension trust, both because contributions are typically set over multiple years and because contributing employers vary over time, either because of bankruptcy or because of selective exit through withdrawal. These plans also cannot carry a funding surplus, which is necessary to withstand the negative returns that are an inevitable component of risky investment choices,” he told lawmakers.

According to Naughton, once the decision is made to adopt some form of annuity purchase model, it will be far easier to address other issues related to the amount of aid to be provided to failing plans, the amount of the PBGC guarantee and how the PBGC should interact with failing plans, as well as any potential changes in the amount of PBGC premiums. “To ensure that employers do not selectively withdraw from plans, it is worth amending the current withdrawal rules to prohibit withdrawals until a legislative solution to the current crisis is finalized,” he added.

A replay of the hearing and text of witness testimony may be found here.

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