The ABCs of the Pension Crisis

A handful of past guests help Traci summarize the pension crisis, recount the events that led us here and highlight the solutions making the rounds in Congress. Traci’s guests are Jason Russell, senior vice president and actuary from Segal Consulting; Russell Kamp, blogger, pension reform advocate, and managing director at Ryan ALM; Jack Marco, retired chairman of Marco Consulting; and John Elliot, a partner at New England Pension Consultants.

Some highlights from The ABCs of the Pension Crisis:

00:37 – 130 Plans in Crisis!
02:59 – How Did We Get Here?
07:38 – Partitions and the PBGC
09:59 – The “Goofiness” of MPRA
14:12 – Two Different Pension Reform Proposals
27:03 – Some Final Thoughts on Pension Reform…

Show highlights are compiled from past podcasts only available at www.multiemployerfunds.com

Transcript

Narrator  0:02  

This is The World of Multiemployer Benefit Funds Podcast with Traci Dority-Shanklin. If you're interested in labor and union benefit funds, well, you've landed in the right place. We are a go-to source for all things union benefit fund-related, and we are going to bring you interviews with key decision-makers and fund professionals that guide these plans. They'll share their insights, experience, unique perspectives, all of the latest developments, and tips to unlock the mysteries of multiemployer benefit funds. Time is short. So, let's get started.

Traci Shanklin  0:37  

There is a pension crisis in America. Anyone who's been listening to the podcast knows that 130 defined benefit plans are in declining and critical status. That's one and a half million hard-working Americans and retirees through no fault of their own, who are in plans projected to run out of money. Another 200 plans are in critical status but not declining. And the coronavirus pandemic threatens to push this number even higher.  

Traci Shanklin  1:05  

Many of my guests have echoed this crisis and the desperate need for pension reform by lawmakers. Jason Russell, senior vice president and actuary from Segal Consulting weighed in on the pension crisis when he spoke on the podcast last year.

Jason Russell  1:20  

I think the consensus was out of the 1,250 multiemployer plans in total that about 130 of them are in what's called critical and declining status. And then there's another almost 200 plans that are in critical status but not declining. And critical and declining and maybe for shorthand, we can just call it declining status for this conversation. You know, that's an area of focus because these are the plans that are projected to run out of money in 20 years. And actually, a lot of the plans in declining status are projected to run out of money a lot sooner than that.

Traci Shanklin  1:54  

My guest Russell Kamp, blogger, pension reform advocate, and managing director at Ryan ALM, came on the podcast and shared specific examples of human suffering that the pension crisis is making on retirees. 

Russell Kamp  2:08  

So, those 130 plans represent about 1.4 million Americans at this point that could potentially see benefits slashed tremendously. As I mentioned earlier, I've been writing a blog for quite a few years now, and the Teamsters organization around the country -- members -- have found my blog and have used it to provide, you know, education and research to their membership. And as a result, people have been sending me their stories, and it's really heart-wrenching. I mean, there's a woman by the name of Carol, who I've written about on several occasions, who effective this past January saw her benefits slashed from $2,160 a month to only $863. I mean, more than 60%, and I just don't know how our government can sanction such an action.

Traci Shanklin  2:59  

What caused this crisis? How did we get here? According to my next guest, John Elliot, a partner from New England Pension Consultants, regulatory missteps coupled with the economic meltdowns throughout the 2000s, helped create the, quote, perfect storm, for these funds.

John Elliot  3:18  

So, the thing about the defined benefit plan design is when they were first put together and planned, you know, 40 years ago, 50 years ago, the concept of it was that you're going to have new and increasing number of people coming into defined benefit plans. And those contributions and the growth of those plans will go in perpetuity to make sure we pay the benefits for the beneficiaries who retire. Now, the life expectancy when these plans were started, and then the design of these plans was a lot less than it - than we've experienced over the last, you know, 20 years with the - with all the different medical technologies that we have. So, people are living longer. 

John Elliot  3:59  

And then industry, certain industries specifically, started having problems having issues. So, when you get the imbalance where you have as many or more retirees as you do people contributing, the only way to solve that problem is to have massive increases in contributions because you cannot decrease benefits based on plan design. So, that's what really led us to these plans becoming insolvent, and the plans that are doing well are plans that are growing - growing their contribution base of employees contributing into the plan. And plans that had benefit levels, which also were more attuned to what the contributions were in planning for the aging population and living longer. 

John Elliot  4:47  

You also had this unfortunate situation, the perfect storm of basically 1999 - 2000 where you had plans that were doing extremely well based on what the markets were doing in the late 90s. And most of them were pretty plain vanilla stocks and bonds. And you had, you know, these massive increases in those plans in dollars and in funded status. And it got to a point where they were in danger of losing the tax-deductible contributions that the employers have into the plans based on the loss because they didn't want plans to be significantly overfunded. It was more targeted towards corporate plans, so corporations wouldn't just stash money as tax haven into the defined benefit plans to later take that money back out, have it grow, and then take it back out because they're overfunded, which they could do. 

John Elliot  5:41  

That didn't - multiemployer plans can't do that. But it impacted those plans because the laws applied to defined benefit plans. So, you had these massive increases in funded status, and they had to do something in order to prevent them losing that contrib - that tax-deductible contribution. And what a lot of plans did was they increased benefits. So, when you increase the benefits, it decreases your funded status. And that's what they did. That's how they fixed the problem. The problem with that was that then 2000, 2001, 2002 hit and the decade of the 2000s, basically, where you had a zero return for equities for 10 years. So, here you go, you've increased your benefit liabilities, your assets have not grown to match that based on what's happened in the markets for the next 10 years. And you had a significant decrease in funding status for a lot of plans. I call it the "perfect storm," because then 2000 - 2008 was involved in that. And you also had decreased contributions. 

John Elliot  6:40  

You also had in 2008, the situation where a lot of plans took away early retirement benefits and different things, but they had to announce it. So, you saw a mass exodus in some plans of people that said, "Okay, well, I can do early retirement with no reduction in my benefit if I do it before this date because at this date, the plan rules change." So, you saw that happen in a lot of plans. And so if - if plans had that imbalance, where you had more retirees than people with contributions, and then you had all these things happening in the early 2000s, it really, really negatively impacted plans. And so, and some plans were able to navigate through that because of the contributions they were able to either increase contributions or expand the number of active workers versus the retirees and others that were in more dying industries. Unfortunately, were - are not surviving. They're on that list.

Traci Shanklin  7:38  

The Pension Benefits Guaranty Corporation is a federally chartered agency tasked with protecting retiree benefits of troubled plans under ERISA, the Employee Retirement Income Securities Act of 1974. The PBGC has some limited ability to partition but rarely does so due to its own solvency concerns and stringent requirements for applicants. My guest Jack Marco, retired chairman of Marco Consulting, pointed out one of the legislative missteps that contributed to the regulatory problems inside the PBGC. 

Jack Marco  8:14  

I don't know how many years ago was that five, six years ago, seven years ago, that the Democrats, you know, passed as well as the Republicans. And it was really the goal of it was to protect the PBGC, the insurance piece of the pension funds because what they were having is they were having companies, sometimes because of outsourcing some reason because of technology, that companies were going out of business and the remaining employers were left holding the bag. Look at the bill. 

Jack Marco  8:45  

And then the whole, you know, and as they - as these companies went under, the PBGC was stepping into try to cover their participants. Well, a lot of that was happening. So, the PBGC was going into the red, and they could only increase the taxes that they pay - that the pension funds pay to the PBGC only so far. So, it needed some government intervention. Well, the government intervention was instead of subsidy - putting more money into the PBGC. They said, "Well, we'll cut the liability down by changing the rules in the pension funds." And the first thing they did was to change the amortization period for the liabilities from 30 years to 15. Well, there couldn't have been anything worse to happen. And it happened. Oh, actually, now that I'm thinking about it - it happened shortly after the crisis of 2000 -- 2008. 

Jack Marco  9:36  

There couldn't have been a worse time. But they basically, I always tell people just imagine you're making your mortgage payment of so many dollars a month. And your lender comes in and says, "Well, I've just changed it. You're now on a 15-year mortgage. You owe the same amount of money but you got to pay it off in 15 instead of 30 years." Your payment just went through the roof. Well, if the plans weren't in enough trouble to begin with, they made it much worse.

Traci Shanklin  9:59  

In 2014, the Multiemployer Pension Reform Act, otherwise known as MPRA, was passed. It was supposed to provide additional authority for the PBGC to partition troubled plans. But instead, it caused more headaches for those already troubled plans.

Jason Russell  10:17  

The Multiemployer Pension Reform Act of 2014 passed right at the end of 2014 took effect in 2015. And MPRA, the key aspect of MPRA is that if you're a plan that is in this - this new category of declining status, that you're projected to run out of money in the next 20 years or sooner, that you could actually reduce benefits that have already been accrued. You're going to cut benefits that have already been earned, which is just going against that sort of fundamental that was there under ERISA of the anti-cutback rule. But in order to do that, you'd have to apply to the US Department of Treasury for approval, then the proposed suspension of benefits is what they would call them would have to go to the participant population for a vote. And then if you cut benefits, then presumably that would be enough to enable the plan now with lower benefits, it would enable that that plan to survive. 

Jason Russell  11:06  

But MPRA didn't work as it was supposed to. Some of the biggest plans that applied for relief under MPRA to cut benefits did not get that approval that they sought. And so, they just continued on their path toward insolvency. 

John Elliot  11:19  

So, the only thing that's been done, and it's more of a last resort situation that really hasn't even been managed very well, is the MPRA. So basically, what they've said was, if the plan has no way of getting out of, you know, going towards insolvency, that you could apply for the ability through the Treasury of reducing accrued benefits, then the way it's structured is really, I don't even know how to describe it, but goofy, in the way they set it up. And they've rejected a tremendous amount of applications including the Central States Teamsters, on wanting to make these MPRA cuts. They make you jump through all these hoops. And listen, anyone who's going to apply for a MPRA cut is doing so to try to save the plan. So, that they don't go to the PBGC and start getting, you know, close to 30 cents on the dollar on their pension. 

John Elliot  12:16  

You know, so okay, so you get 25%, 30%, 40% cut in your pension, that's horrible for anybody. But it's better than getting a 70% cut. And they're thinking also about the current people contributing to the plan who may never get $1 of benefit out of the thing or very, very little benefit down the road from the PBGC. So, they're trying to do the right thing, and they're getting rejected because it's very murky on what the rules are and what would constitute a legitimate request through MPRA. That's the only help legislatively and tools that they've given for these plans that are in trouble.

Traci Shanklin  12:55  

In August of 2017, MPRA's failures prompted the nonpartisan watchdog agency NCCMP, the National Coordinating Committee for Multiemployer Plans, to issue a letter to the PBGC outlining and criticizing all of the regulatory problems that they found. I hope to have somebody from the NCCMP on the podcast. My hope is to find out if any of their concerns and reforms are being addressed in the current legislation.

Russell Kamp  13:24  

We've experienced tremendous legislation and the impact from that for decades now. I mean, certainly predating even ERISA. But ERISA was certainly a milestone in the effort to try to protect and preserve these defined benefit plans. And I think for the most part, legislation has been very powerful and very positive. You know, I question MPRA, only because it allowed for the slashing of benefits for these participants who have done nothing wrong. You know, they've had hourly wage increases deferred to fund retirement contributions. They've made those contributions regularly out of their paychecks. And now all of a sudden, we're going to tell them that, you know, we can slash benefit payments up to 50% or more, I just find that distasteful.

Traci Shanklin  14:12  

Since 2017, two proposals, one from the Republicans and one from the Democrats, have emerged as leading contenders for pension reform legislation, and have been making the rounds on Capitol Hill. 

Russell Kamp  14:25  

I've written a lot and spoken about the Butch Lewis Act, and I know there are other pieces of legislation that are out there, and I know that HR 397, which is the Butch Lewis Act, recently passed through the House and is now sitting within the Senate. And I'm led to believe that there are going to be most likely significant amendments to that which I find unfortunate, but the legislation that is being proposed within 397 I think is the way that we need to go. These plans are really strapped for cash in the near term, I mean, they're all cashflow negative, we're not just talking about Central States and the Miners, which are two of the most notable plans in that condition. But you know, when we first started looking at this, there were 114 critical and declining plans. Today, that number continues to grow, and it's probably close to 130. And then you have on top of that, probably another 200 or so critical plans that could easily fall into that critical and declining category. 

Russell Kamp  15:30  

So, we need to have the help of the US government to close that underfunding, or the cash flow that's necessary over the next 5, 10, 15 years, there's just no way and not enough time that investment returns are going to make up for that deficit. So, we need to have a partnership. You know, we have public-private partnerships with regard to infrastructure all the time. Well, this is going to be a classic example of a public-private partnership to help preserve the benefits for these individuals who don't have a tremendous amount of resources outside of their pension plan.

Traci Shanklin  16:09  

The low-interest loan proposal put forward by the Democrats is called the Butch Lewis Act. Butch Lewis was a decorated Army Ranger who served in the 173rd Airborne Division and the Special Forces during the Vietnam War. His real name was Estil Lewis Jr. After serving, he attended truck driving school and eventually became a Teamster city truck driver. He rose through the ranks and became president of the Teamsters Local 100, where he spent the remainder of his career fighting against massive cuts to the Central States Pension Fund until his death in 2016. 

Traci Shanklin  16:47  

The second proposal came from Senate Republicans, Charles Grassley and Lamar Alexander. They proposed partitioning the liabilities of declining and critical plans so that the remainder of the plan could remain healthy and solvent in a white paper called Multiemployer Pension Recapitalization and Reform Plan. For anyone interested, I will provide a link to the Senate Finance Committee on our website where you may read a PDF copy of their November 2019 white paper. 

Traci Shanklin  17:17  

Retired chairman of Marco Consulting, Jack Marco, briefly touched on the idea of partitions when he came on the podcast to talk about pension reform.

Jack Marco  17:27  

So, one thing right off the bat because I had experience with several plans that were having really big problems after these things change, for example, in the printing industry. So, in the printing industry, you know, 30 years ago, there was probably, I don't know, 20 different trades within the printing industry, lithographers photo engravers line of type, graphic artists, all these things, all gone because of technology. And so, these companies, these employers, who were employing people in those kept merging with other employers because the business was going away. And there were some like new, some newspapers, even newspapers got hurt tremendously. But there were some in the fund some employers who were making it in their specialization, whatever they're making it, but they ended up having the liabilities of all these people who've gone out of business, who are members of that pension fund, and so that we're about to put that - the employees that wanted to stay and continue to contribute in a pension fund weren't going to be able to afford it, because all those liabilities were being dumped on them. So, that what would happen next, then what would happen next is they would go under, and the entire plan would go to the PBGC. And they'd have to cover it. 

Jack Marco  18:36  

So, my argument was, the PBGC should move into those Taft-Hartley plans, where employers have gone out of business, and take those pieces out of the Taft-Hartley plan, and take it over in the PBGC. And let the rest of the plan continue because the employers are, are healthy and they're willing to contribute. The Bakery had the same problem when Hostess went under. All of a sudden, the rest of the employers had that terrible liability of all those workers who were expecting a benefit from their pension funds. Well, we wanted to say to the PBGC, "Take over those workers who just lost their business that they were working in. Pay that they take care of that responsibility and the rest of the plan to keep going and won't have to go to the PBGC."

Traci Shanklin  19:22  

I thought Jason Russell from Segal Consulting did a great job summarizing both pension reform proposals, as well as highlighting the underlying issues and differences between the Democratic and the Republican plans.

Jason Russell  19:36  

They're essentially two proposals that - that have been out there for a few years now. You know, one of them is a loan proposal. It's often referred to as the Butch Lewis Act. That's the Senate version of that proposal. And it's really been around since November of 2017. And has been introduced and reintroduced and amended a few times. And you know, so that's one proposal where you would provide federally backed loans to enable the plans to remain solvent. And then on the other side, you've got a proposal to just basically expand the PBGC's ability to partition liabilities away from plans that are distressed, leaving the remaining plan in a position where it can remain solvent. 

Jason Russell  20:18  

And different folks on Capitol Hill have very strong views about which is the right way to go. And actually, when I was more actively involved with the American Academy of Actuaries meeting with people on the Hill, I remember in the middle of 2018, when in 2018, was the year that the joint Select Committee for the Solvency of Multiemployer Plans. That was the year that - that joint Select Committee was formed with the task of coming up with some solution by the end of 2018. And I think we all know that that didn't happen, but they did float some ideas as to how you might - how you might fix this problem. 

Jason Russell  20:50  

And I remember when we met with some of the Joint Select Committee staffers back in 2018, they said, "Okay, you know, we - we understand the loan proposal that's out there. We get it. We see the advantages and disadvantages of it. What else you got? What are other - other ideas are out there?" And that's where the conversation turned to partitions. And actually, partitions was an idea that was really a cornerstone of the Joint Select Committee proposals that were released at the end of 2018, you know, no actual proposed legislation and just, you know, an outline of ways that we could fix this current problem that we're in or, you know, the pre-COVID-19 problem. 

Jason Russell  21:26  

And it really just came down to for, you know, whether you provide loans, or you increase partitions, a lot of folks on the Hill just saw this, as, you know, optically. They didn't feel like it was a good move for them to provide more assets to plans that were troubled. Instead, they could take away benefit liabilities, and get the plans to the same place and actually do it within the structure that exists under current law, and partitions are available under current law. They're just - they're constrained by the fact that PBGC doesn't have the resources to actually do meaningful partitions. 

Jason Russell  22:01  

So, you know, whether the loan proposal, you know, can come back and actually gain support - bipartisan support on Capitol Hill, whether there's some partition proposal, then the question will be, you know, how's it paid for? You know, what's the right balance between federal funding from the US taxpayer to pay for a loan program or to prop up PBGC? To give a cash infusion to PBGC, so it can actually do partitions? And then how much does the multiemployer system need to pay? So, there was a proposal that came out at the end of 2019, from Senators Grassley and Alexander that involved the partition program, but then basically had the cost of that partition program paid almost entirely by the multiemployer plan community. You know, through increased premiums on plans through, you know, basically premiums or taxes on retiree benefits, and then also from stakeholders in the community on - on local unions and employers. And that's another key decision that needs to be made. You know, how is all this going to get paid for? 

Jason Russell  23:06  

And I think most people would say that there needs to be a very significant component of the funding coming from the federal government because going back to that earlier discussion that we had about plans not being able to become over-funded to bolster their funding levels in the late 1990s. And, you know, basically, PPA not doing enough. MPRA not doing what it intended to do. You know, they're all along the way that these plans have ridden this roller coaster and been doing the best that they could do to remain solvent. There have been legislative and regulatory issues, barriers that kept plans from taking the action they needed to, you know, to stay solvent. And that's an argument that - that significant federal funding needs to be part of the solution. And that's just, I'll pause there because I've just talked about the plans that are currently projected to run out of money. There is another conversation about how do we keep a new solvency crisis from emerging but that's got several layers to it as well.

Traci Shanklin  24:04  

I want to make sure that I understand the federal funding component, are you talking about hard dollars or federally backed loans?

Jason Russell  24:13  

It could be either. So, if you focus on the loans, you know, basically to provide a loan to a troubled multiemployer plan, there would need to be a new agency. That's what the proposal calls for a new agency that would be set up and its funding to issue these loans has to come from somewhere. So, you know, basically, it will just come from the US Treasury and the Treasury would issue bonds to enable this new agency to provide loans to the troubled plans. And, you know, under the loan proposal, it isn't just the funding from the Treasury Department. It's also the risk that the loan might not be paid back.

Jason Russell  24:48  

You know, there is a chance that it probably wouldn't happen in the next 10 years, maybe even 20 years, but there's a chance that, you know, that the remaining plan, you know, you get a loan, and I glossed over the point that under this proposal, you would get a loan as a distressed plan. You would use the proceeds of that loan to immunize or annuitize benefits that are payable to retirees and perhaps even terminated vested participants, you know, leaving potentially just the active participants who - whose benefit seem to be covered by what assets the plan does have. 

Jason Russell  25:19  

Well, then, so the assets the plan does already have, and once you've used the loan to, you know, to take care of the retiree benefits, Well, those assets have to both pay for the active participant benefits, and then repay the loan, you know, when combined with the contribution income that's coming in, and it isn't just contribution income. It's also the investments that are going to be earned on those assets. So, you know, if there were another market downturn, actually like the one that we're seeing right now, that could put a plan that receives a loan in a tough position where it might not be able to fully repay that loan, as required. And that's - that's a risk to the - to the US Treasury. That's a risk of the - the US taxpayer that the loans wouldn't be fully repaid. And, you know, and Congress takes that into account when - when the CBO does it scoring, they realize that this is a cost to the federal government, you know, both, you know, issuing the loans, and then also the chance that they might not be repaid. 

Jason Russell  26:13  

On the partition side, you know, it really just comes down to, you know, Treasury providing PBGC with the money that it needs to do these partitions. So, it's also money coming from the US Treasury. But as I said, there - there's that discussion that is happening right now. What's the right balance, you know, how much should come from Treasury versus how much should come from increased PBGC premiums, let's say. And that's actually a key difference between the loan proposal and the partition proposals. Loan proposal focuses on the funding coming pretty much entirely from - from the US Treasury. The partition proposals have varied, depending on who's making the proposal, on how much Treasury pays for to give PBGC the ability to do these expanded partitions versus how much do PBGC premiums need to be increased on plans and how much funding comes from other sources.

Traci Shanklin  27:03  

In February of this year, the new 117th Congress introduced pension reform called the Butch Lewis Emergency Pension Plan Relief Act of 2021. Another version called EPPRA, or E-P-P-R-A, the Emergency Pension Relief Act includes partitions, which was introduced by Democratic Representatives Bobby Scott and Richard Neal back in January. Both proposals will likely be reconciled during the negotiations for passage in the Senate. 

Traci Shanklin  27:32  

I hope that any new pension reform legislation contains parts of both proposals. I know that any reform legislation will require sacrifices on both sides. But ideally, the reform will include some form of low-interest loan provision and expanding the PBGC's ability to partition. These two provisions will allow troubled plans to remove the worst liabilities, so the rest of the plan may remain solvent. Again, ensuring that one and a half million hardworking Americans and retirees will be able to retire with dignity. Regardless of what the final bill looks like, we can no longer afford to do nothing. The human cost is too great.

Russell Kamp  28:16  

The bottom line is that we have roughly 10 million folks in total, who are in these, you know, 1300 or so multiemployer pension plans that are relying on us as an industry to do the very best that we can. And I think that we have a lot of well-meaning individuals who have participated for many years and trying to do the very best. But because we're doing the same old, same old, and it's not working, I think we collectively need to do something different. And without doing something different to try to help us stabilize these plans, I'm fearful that we're going to have at least 1.4 million people if not more fall onto the federal social safety net, which is going to be a heck of a lot more expensive than if we just provide loans for the next 30 years with a high degree of confidence that those loans will be repaid. So, hopefully, we can get our legislators in DC to come together for the benefit of these people and to pass legislation. It's just so critical right now.

Traci Shanklin  29:16  

As pension reform unfolds in Congress. I will be speaking with experts on future podcasts to help make sense of this legislation. We'll stay on top of any changes, what stays in, and whether or not MPRA concerns are addressed. If you'd like to check out any of the materials mentioned on the podcast. I will be posting the links on our website at www.multemployerfunds.com. That's www.multiemployerfunds.com.  

Traci Shanklin  29:45  

If you enjoyed listening to the podcast, please subscribe to us on Apple podcast or wherever you choose to listen to your podcasts. Thanks again for joining the conversation where listeners connect with leading experts throughout the financial and investment world. Be part of the change. 

Traci Shanklin  30:03  

And that's it for this week's episode of The World of Multiemployer Benefit Funds Podcast. We'd love to hear from you. And if you have any comments, questions or suggestions, head over to www.multiemployerfunds.com, and let us know. Thank you for joining us, and we look forward to next time.