The funded status of some multiemployer pension plans has not seen any drastic improvements since the great recession. But now, as proposals lurk in Congress to eliminate pension liabilities and improve the overall insolvency of these plans, there may be changes on the horizon. José M. Jara, principal and national practice leader for multiemployer plans at Buck Consultants at Xerox, explains the benefits of new proposals and how modifications to old policies can bring plans back into solvency.
The Pension Protection Act of 2006 is set to expire at the end of the year. A new proposal from National Coordinating Committee for Multiemployer Plans takes a swing at preserving the current system, helping deeply troubled plans faster and developing innovative ways to create new plans. Do you see the NCCMP’s proposal gaining any traction in Congress this year?
It’s too risky; it doesn’t make political sense to do it at this time. What might happen, though, during the session is the easy fix. Just extend it [PPA] for a year, so the rules don’t change. The EXPIRE Act satisfies multiple tax provisions. My best guess is that they are going to do that. But also they will be implementing the NCCMP proposal, maybe not in its entirety. The other thing is, what other recourse do you have? You have the [Pension Benefit Guaranty Corporation] predicted to go insolvent themselves by 2025.
How can the NCCMP proposal provide relief to plans lingering near critical status?
The anti-cutback rule – the most controversial aspect of the NCCMP proposal – involves the suspension of benefits, or what was protected by the anti-cutback rule [under the PPA]. But this only applies to plans in the severely red zone – those deemed already to go insolvent. For these types of plans, rather than letting them go insolvent, why not try to get them out of insolvency? Part of that calculation is to cutting back on some of these benefits, or what the proposal calls “suspension of benefits.” Should the plan go back to solvency, any improvement in the plan would have to be restoring those cuts to those participants.
Another factor that’s protected for this is that you need governmental approval. It’s limited now to PBGC approval, the proposal is, but it’s possible it may go through Department of Labor approval. But you are going to have to submit to a government agency to approve these benefit funds; I think there can’t be more protection than that. It would help because it would have all those significant cost savings, temporarily, just to get you out [of insolvency].
While multiemployer plans reduced their funded status deficit by $45 billion in 2013, 15% of these plans remain less than 65% funded, according to recent data from consulting and actuarial firm Milliman. Are these retirement plans becoming more insolvent?
Not that I have seen. There are a minority of plans that are in the red zone. That has been consistent, and that number hasn’t really increased. But some that are in the red zone can drastically affect the whole system, so that’s the issue. But there hasn’t been a significant increase in numbers of shifting zones from green to yellow or from yellow to red, which is good.
It’s just these plans lingering in the red, some are predicted to go insolvent at this date, and why not try to make these changes to the plan rather than go insolvent? Why not give it to the PBGC today if it’s predicted to go insolvent? I don’t think the PBGC will take it on, and will let it ride it out. … You have to look in greater detail to those types of plans. There is more than one factor that can make it go to a different zone status.
Is there a way for employers and plan sponsors to do this without relying on help from Washington?
In the multiemployer space, what would help with the funding would be an increase in contributions – more money coming in to be able to invest prudently. The problem with the system is that many plan sponsors, employers, don’t want to enter [the system] because of the harsh ramifications on them for getting out of the plan. If there’s a compromise, where they could come in without the fear of [what happens] if they have to withdraw from this fund, that would certainly help in the funding. But encouraging more employers to participate means more money in, more money to invest; but, of course, you’ve got to invest prudently – that would certainly help out with the funding.
Investing prudently may fall back to the fiduciary. Do you see the role of the retirement plan fiduciary changing at all in the near future?
I don’t see anything that hasn’t been around since the 1830 Harvard College v Amory case on what your fiduciary duties are. It’s a very gray area. I don’t think there will be any new regulations in that regard. The system here is not in jeopardy because of the looseness of your fiduciary duties, that’s not it. It’s in this place because of the financial crisis, because of certain areas of the law that make it unattractive to come in, and these are the issues that are really affecting these plans.
But in terms of fiduciary duty, one thing that would be of interest is careful analysis into what your investment options are. This should be scrutinized at its highest in today’s time because the problem is, if you’re one of these plans, there might be the temptation to go enter into an alternative investment arrangement. While I’m not saying that it’s inappropriate – it might be appropriate with the appropriate percentages to put into the plan – it may be also something that temptation – the instinct to just go into it [these investment strategies]. It’s a good time where fiduciaries should look at their governance structure because these plans might not have the proper governance procedures in place. They should look at their investment policy statement to make sure they are applied to today’s world. They might have an investment policy statement from 10 years ago, and it’s overly broad.
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