For months, multiemployer pension plan sponsors, participants, and their advocates have been waiting to see how the PBGC (Pension Benefit Guaranty Corporation) would interpret the American Rescue Plan’s legislation providing bailout money to multiemployer pensions, the The Emergency Pension Plan Relief Act of 2021 (EPPRA), which, as regular readers will recall, left multiple issues very unclear due to the manner in which the law was written.
Now the PBGC has posted its interim final rule on the implementation of this bailout. This means that there will be a 30 day comment period before the decisions are finalized. But should this rule be finalized, and skipping over the arcane details, here’s how the bailout would work:
How much money?
In the first place, the legislation had stated that the bailout fund would pay qualifying plans lump sums of “such amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment under this section and ending on the last day of the plan year ending in 2051.” This could be interpreted, most generously, as simply giving plans every dollar that they would otherwise spend on retirement benefits in the next 30 years. That’s a lot of money. Alternatively, the text could be read as intending only as much additional money that a plan would need, taking into account assets they already have and contributions that the plan projects it will receive in the coming 30 years from participating employers, to be able to pay those benefits.
But what happens then? In the narrowest interpretation, this means that a plan otherwise forecast to become insolvent soon enough to be eligible for this bailout, would be insolvent, instead, in 2051. And since the employers’ contributions are union-negotiated and essentially reflect foregone wages, young employees would be paying into pension plans without anything to show for it, in 2051. This seems terribly unfair, and, in fact, back in April the National Coordinating Committee for Multiemployer Pensions presented to the PBGC a set of recommendations calling for a more generous or middle-ground interpretation that they considered “consistent with Congressional intent,” in which at least some assets would be projected to be left-over in 2051.
Instead, the PBGC believed that “the plain meaning of the statutory language” is in fact this narrow interpretation. This won’t make multiemployer pension advocates happy, but that’s not the PBGC’s fault; it’s the fault of Congress for writing the law they way they did, in a manner that simply kicks the can down the road by 30 years.
How will the money be used?
Regular readers will know that one of the differences between funding requirements for multiemployer and for single-employer pension plans is that the latter are required to use corporate bond rates to determine their liabilities, and multiemployer plans use as their interest rate (discount rate) the return they expect on their investments (in the same manner as for public pension plans). However, this legislation adds in a bit of a quirk; whatever an individual plan might use for its usual valuation interest rate, it is reduced down to a cap that’s set at a level 200 basis points (2 percentage points) above the corporate bond rate, or, as the law puts it, “the rate specified in section 303(h)(2)(C)(iii)(disregarding modifications made under clause (iv) for such section)” which is actually how the corporate bond rate is defined for single-employer plans in the comprehensive pension funding law ERISA (p. 137). This in itself adds in a bit of fairness, putting plans that were more or less conservative in their original valuations on a level playing field.
But here’s the wrinkle: the law requires that the bailout money be segregated, used only to pay out benefits, and be invested “in investment-grade bonds or other investments permitted by PBGC,” and the PBGC’s interim rule hews fairly closely to the legislation’s corporate bond requirement. Multiemployer pension supporters had objected to this restriction, noting that if the amount of bailout money was calculated based on an interest rate using corporate bonds plus 2%, but investments can only be based on corporate bonds with their lower return (right now, this is 3.5% vs. 5.5%), then there’s simply no way for those plans to invest their money to return enough interest to pay for the benefits they are supposed to fund.
As it happens, the PBGC itself indicates a willingness to engage in further discussions on their interpretation, and suggests that they might be willing to be persuaded that certain low-risk stocks might be acceptable. And, honestly, I’m not so sure this is a disaster either way; most pension plans, even poorly funded enough to be eligible for bailout money, have a certain amount of assets even so, and most pension plans have a practice of diversifying their investments into stocks and bonds, so that a greater proportion of the plan’s own assets could be shifted to stocks to make up for the mandatory bond investments of the bailout funds.
Who wins, who loses?
The PBGC’s decisions here are not what organizations such as the NCCMP would have liked, although, clearly, it is the PBGC’s job to interpret the law, not to try to fix a poorly-written law.
At the same time, no multiemployer pension plan is worse off with this legislation than without it, even if it isn’t as generous as they would have liked. And nothing prohibits those plans from boosting contributions and using additional contributions to fund future accruals — which would mean that pension plans which express their contributions as fixed dollar amounts, rather than a percentage of pay, will be better positioned to provide for existing employees as well as retirees. What’s more, the calculation of future contributions is based on a one-time open group projection, without being revised from year to year, so that, in principle, if more workers join a plan, the plan will be better off. (Of course, if the projection is too optimistic about the number of future workers, the opposite will be true.)
But, of course, this is $86 billion that could have been spent for other needs, or not spent at all. And, however much advocates profess that they still hope for a more comprehensive revision of funding rules for multiemployer pensions, the poorly-conceived nature of this bailout makes it less, rather than more, likely that both sides of the aisle will come together to repair multiemployer pensions and prevent future bailouts.
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