On November 20, 2019, Senators Chuck Grassley and Lamar Alexander released the Multiemployer Pension Recapitalization and Reform Plan proposal. The proposal was released in the form of a white paper and a technical explanation and has not been introduced as a legislative bill yet. The proposal incorporates the work of the 2018 Joint Select Committee on the Solvency of the Multiemployer Pension System. Generally, it seeks to have the Pension Benefit Guaranty Corporation (PBGC) multiemployer pension plan insurance program adopt characteristics of the single employer pension insurance program.
The Multiemployer Pension Recapitalization and Reform Plan proposal is based on a shared responsibility framework in which employers, unions, workers and retirees would make a sacrifice to shore up the PBGC’s role as an insurance company. A “limited infusion of taxpayer dollars” would be proposed to help the PBGC insure some liabilities of soon-to-be insolvent plans. Without reforms, the PBGC reports the multiemployer insurance program would be insolvent no later than 2026. The PBGC fiscal year 2019 report showed a deficit of $65.2 billion, compared to a deficit of $53.9 billion in 2018.
Below is a high-level look at some components of what the Multiemployer Pension Recapitalization and Reform Plan would do if the proposal became law.
Expand PBGC Existing Partition Authority
Partitioning permits PBGC to carve off “orphan” pension benefit liabilities attributable to employees whose employers previously withdrew from the multiemployer plan. The plan with unfunded liabilities requires financial assistance from the PBGC while the healthy plan continues.
- PBGC would only grant an order for a special partition if it determines that the plan sponsor has adopted all reasonable measures to avoid insolvency, including benefit suspensions no greater than 10%.
- The Central States Pension Plan, the Road Carriers Local 707 Pension Plan and the United Mine Workers of America Plan would be automatically eligible for partition.
- In order for the partition program to operate effectively, a limited amount of federal taxpayer funds would be transferred to PBGC. There would be provisions intended to protect taxpayers from risk.
- Plans approved for a liability removal under the new partition program would be subject to the following conditions:
- PBGC would appoint an independent trustee to the board.
- PBGC would be authorized to remove the board of trustees if it can demonstrate mismanagement and replace the board with an independent trustee pursuant to a court order.
- Trustees would have ten-year term limits with a transition rule for existing trustees.
- Executive directors would have 12-year service limits with a transition rule for an existing director.
Increase the PBGC Maximum Monthly Benefit
The PBGC maximum guaranteed monthly benefit would increase by about $600 per month. This is intended to reduce the risk of significant reductions in retirees’ benefit payments should a plan become insolvent.
Increase the Multiemployer Plan Flat-Rate Premiums
Multiemployer plan flat-rate premiums would significantly increase from $29 (in 2019) to $80 per participant per year. For comparison, the single employer plan flat-rate premium is $80 (in 2019) per participant per year.
Add Multiemployer Plan Variable-Rate Premiums
Multiemployer plan variable-rate premiums for underfunded plans would be payable to PBGC. The per-participant amount of the variable-rate premium would equal 1% of the current unfunded liability divided by the number of participants and would be determined on a per-participant basis for purposes of applying a cap. In no case would the cap be higher than $250 per participant. For comparison, the single employer plan variable-rate premium cap is $561 per participant in 2019.
Add Employer, Union and Retiree Copayments
A monthly $2.50 fixed rate copayment would be imposed on each union and participating employer for each active employee covered under the plan pursuant to a collective bargaining agreement. Multiemployer plans would be responsible for collecting the copayments and transmitting them to PBGC on a monthly basis.
Plans would be required to withhold copayments from retirees receiving benefit payments and transmit the “premiums” to PBGC on a monthly basis. The copayments would be a fixed percentage of benefit payments with the percentage determined by the funding zone status ranging between 3% (for a plan in endangered status) and 10% (for a partition plan). Retirees who are elderly or disabled would generally be exempt.
Adjust the Rate for Discounting Liabilities
Multiemployer plans would match the single employer funding rules in the requirement to use corporate bond rates rather than expected asset return as the rate for discounting liabilities.
Change MPRA Voting Procedures
Voting procedures under Multiemployer Pension Reform Act (MPRA) suspension of benefit rules would change to require that only returned ballots would be counted and that the participants’ votes would be binding in all circumstances.
Change Funding Zone Status Categories and Measurement
Plans would be required to look further into the future in estimating their financial status, institute a form of “stress testing” to check whether a plan can remain financially sustainable through potential economic and demographic “shocks,” and bolster the steps a plan must take when it begins to show signs of financial hardship. New incentives for multiemployer plans to improve their funding status would be available by establishing new upper-tier zones for very healthy plans, which would be subject to fewer restrictions as long as they continue to demonstrate financial health and an ability to weather potential financial shocks and protect participant benefits.
Add Incentives for Mergers
The proposal would eliminate the MPRA requirement to restore benefit suspensions in a merger between a stable zone or higher plan and a critical zone plan. PBGC would be directed to create withdrawal liability methods that would permanently insulate employers in a stable zone or higher plan that merges with a declining plan from withdrawal liability attributable to the unfunded liabilities of a declining plan at the time of the merger. The proposal would eliminate the MPRA requirement that financial assistance in a facilitated merger be necessary for the merged plan to remain solvent before PBGC may provide such assistance.
Change Withdrawal Liability Calculation
The proposal would replace the calculation of withdrawal liability under current law with a new basis for determining the liability based on a specified duration of annual payments that would correspond with the plan’s funded percentage. Mass withdrawal liability would be eliminated. Plans would be required to provide withdrawal-liability estimates to all contributing employers free of charge every three years. These changes are intended to encourage current employers to stay in the plan and new ones to join.
Modify Disclosure Requirements and Penalties
The annual funding notice and zone status notice would be modified. Information related to the multiemployer plan’s endangered or critical status would be shifted from the annual funding to the zone status notice. A more streamlined annual funding notice would provide information relevant to participants in better funded plans. A simplified zone status notice would offer more targeted information to participants in distressed plans. The notices would be required to be provided to participants and beneficiaries, to the bargaining parties, and jointly in electronic format to the PBGC and the secretaries of the Department of the Treasury and Department of Labor. Penalties for failure to provide information to government agencies and participants would be established or increased.
Establish New Composite Plans
A multiemployer plan would be able to set up a new hybrid pension plan on a prospective basis, called a composite plan, which would pool employer contributions for investing but would only provide benefits to participants based on the contributions and any associated gains on their investment. Employers establishing a new composite plan would be relieved of withdrawal liability for benefits in the new plan. The new plan would not be PBGC-insured, so there would be no premiums to pay. The defined benefit plan would become a legacy plan. The proposal would include provisions to preserve legacy plan funding.
Next Steps for the Multiemployer Pension Recapitalization and Reform Plan Proposal
It’s likely the Senate Finance Committee members will be the first Congressional group to try to resolve differences. For example, Senator Sherrod Brown has concerns with some provisions, and Senator Rob Portman said the proposal will require some changes. Several members expressed a willingness to work together and compromise where needed. PBGC Director Gordon Hartogensis has said the Administration stands ready to work with Congress. As for the House, since this proposal does not include the Butch Lewis Act (HR 397) passed by the House, it is unclear how the Multiemployer Pension Recapitalization and Reform Plan proposal will be received.
Senator Portman indicated technical feedback from PBGC and the Congressional Budget Office could be expected in the coming weeks.
The Senate Finance Committee is accepting public comments on the Multiemployer Pension Recapitalization and Reform Plan. Comments may be submitted to [email protected].
Congress is working on a tight timeline for the rest of 2019. As of now, a continuing resolution funds the government through December 20, 2019, which would be the next and possibly last opportunity to attach legislation to the spending bill. Generally, there is not much legislative activity expected in 2020 because of the November presidential election.
The International Foundation will continue to follow legislative and regulatory updates for multiemployer pension plans. Check out our Multiemployer Pension Reform Act (MPRA) page for future updates on multiemployer pension reform.
Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation
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