In Search of Greater Retirement Security Presented to: The National Labor Management & Conference Hollywood, Florida February 15, 2016 Randy G. DeFrehn Executive Director National Coordinating Committee for Multiemployer Plans

Multiemployer Pension Reform Act Developed in response to Congress’ request for technical corrections to PPA ’06 Developed in response to Congress’ request for technical corrections to PPA ’06 Viewed as opportunity to address other existential threats to the multiemployer system Viewed as opportunity to address other existential threats to the multiemployer system – Tighter funding requirements under PPA compounded by recession driven asset losses that would result in plan insolvencies, massive benefit reductions and insolvency of PBGC safety net – Re-emergence of unfunded liabilities – New financial reporting requirements that threaten employers’ access to credit – Refusal by Congress in 2009 and 2010 to even consider legislative proposals offering modest financial assistance to secure PBGC (Pomeroy/Tiberi, Casey) (viewed as “Union Bailout”)

“… we find that a DB pension plan can offer the same retirement benefit at close to half the cost of a DC retirement savings plan. Specifically, our analysis Specifically, our analysis indicates that the cost to deliver the same level of retirement income to a group of employees is 46% lower in a DB plan than it is in a DC plan. Longevity risk pooling in a DB plan saves 15%, Maintenance of a balanced portfolio diversification in a DB plan saves 5%, and A DB plan’s superior investment returns save 26% …… as compared with a typical DC plan.” The More Efficient Approach

Multiemployer Pension Reform Act Response by community was the creation of a broad based coalition of (42) stakeholder groups – Response by community was the creation of a broad based coalition of (42) stakeholder groups – “Retirement Security Review Commission” Spent 18 months evaluating strengths and weaknesses of existing system Spent 18 months evaluating strengths and weaknesses of existing system Produced set of recommendations for comprehensive reform Produced set of recommendations for comprehensive reform

Multiemployer Pension Reform Act 3 Part Proposal – 2 Parts enacted: Preservation – Preservation – – Technical Corrections to PPA Remediation – Remediation – – Voluntary solutions to preserve benefits for participants of the 10% of plans projected to be insolvent without intervention – Insolvency results in reduction of all participants’ benefits to PBGC multiemployer guaranty level If actuary certifies projected insolvency, Trustees may accelerate timing of reductions but only: If actuary certifies projected insolvency, Trustees may accelerate timing of reductions but only: – If plan can remain solvent after reductions are implemented – Benefits must remain at least 10% more than would be paid by the PBGC when the plan would become insolvent and may only be reduced as much as necessary to preserve plan solvency – Disabled and pensioners over 80 protected from reductions (phased in between 75 and 80) – no such protections exist for insolvent plans at PBGC

Innovation Remaining Provision – Remaining Provision – – New Plan Designs Left Out for Jurisdictional Reasons Left Out for Jurisdictional Reasons Proposal would encourage the adoption of alternatives to current DC plans Proposal would encourage the adoption of alternatives to current DC plans Offered two examples – Variable DB and Target or “Composite” plans Offered two examples – Variable DB and Target or “Composite” plans

New Plan Designs Comparable to Other “Shared Risk” Plans: – Dutch Shared Risk Model – New Brunswick shared risk plan – UK Defined Ambition

New Plan Designs Composite [Target] Plans: – Alternative for employers/ employer associations committed to exiting the defined benefit system – Designed to provide an option to current 401(k) plans – Described as “DC plus” rather than “DB minus “ – New “composite” plans to consist of two parts: past service previously accrued under existing DB rules and past service previously accrued under existing DB rules and Future service under new “adjustable” system Future service under new “adjustable” system

Composite (Target) Benefit Plan technically is neither a defined benefit nor defined contribution plan technically is neither a defined benefit nor defined contribution plan – Not DC – Benefits are adjustable like DC, but no individual account – Not DB – not strictly “definitely determinable” Benefit design can mirror DB structure Benefit design can mirror DB structure Designed as a better alternative to moving to current DC design Designed as a better alternative to moving to current DC design 9

Composite (Target) Benefit Plan Addresses shortcomings of Defined Contribution, individual account plans Addresses shortcomings of Defined Contribution, individual account plans – Longevity risks are pooled – Benefits are paid as lifetime annuities – No Leakage, no lump- sums – Trustees retain ability to negotiate fees comparable to current DB fees – Greater Asset diversification and professional investment management 10

Composite (Target) Benefit Plan While investment risk is shifted, required funding standards are more conservative than current system While investment risk is shifted, required funding standards are more conservative than current system – Requires funding at 120% of projected costs to build in buffer against market volatility Eliminates withdrawal liability Eliminates withdrawal liability Increased ability to adjust benefits incrementally to prevent funding distress Increased ability to adjust benefits incrementally to prevent funding distress Options depend upon plans’ current and projected funding levels Options depend upon plans’ current and projected funding levels 11

Composite (Target) Benefit Plan Enhances retirement security by removing obstacles to organizing new participating employers Enhances retirement security by removing obstacles to organizing new participating employers Funding adequacy determined by 15 year actuarial projection Funding adequacy determined by 15 year actuarial projection Benefit adjustments are required at various points based on current funding and 15 year projection Benefit adjustments are required at various points based on current funding and 15 year projection 12

Composite (Target) Benefit Plan If a plan fails the long-term funding target, Trustees must take corrective actions to restore funding level to 120% at 15 years If a plan fails the long-term funding target, Trustees must take corrective actions to restore funding level to 120% at 15 years 1. Between 100% and 120% funded Negotiate higher contributions or modify future accrual rates and notify participants of possible implications Negotiate higher contributions or modify future accrual rates and notify participants of possible implications 2. Below 100% funded but not projected to become insolvent Can modify non-core pension benefits (anything but normal retirement benefit including post-retirement benefit improvements, other PPA adjustable benefits) Can modify non-core pension benefits (anything but normal retirement benefit including post-retirement benefit improvements, other PPA adjustable benefits) 13

Composite (Target) Benefit Plan 3. If, despite having taken all reasonable measures, the plan is projected to become insolvent In addition to the options described above, the Core retirement benefit (Normal Retirement benefit at Normal Retirement Age) may be reduced In addition to the options described above, the Core retirement benefit (Normal Retirement benefit at Normal Retirement Age) may be reduced 14

Protections to Preserve Legacy Plan Funding Contributions must: Contributions must: – Meet PPA / ERISA funding and other compliance requirements (e.g. Withdrawal liability and payment of PBGC premiums), AND – Meet “Minimum Transition Contribution” rates (sufficient to amortize legacy plan liabilities over a period of not more than 30 years), AND – Continue contributions to the legacy plan for all employees, prohibiting exclusion of any group of younger or new employees from determining the contribution to the legacy plan 15

Protections to Preserve Legacy Plan Funding When legacy plan is fully funded for 3 of last 5 years and projected to be funded for the following 4 years – When legacy plan is fully funded for 3 of last 5 years and projected to be funded for the following 4 years – – The plan trustees may eliminate withdrawal liability* 16 Absent this “Bridge” plan sponsors will withdraw from the legacy plan as soon as it becomes financially feasible to avoid potential re-emergence of W/L

Cost Projections In a study of 106 plans replicating the current plan design, a majority of plans : In a study of 106 plans replicating the current plan design, a majority of plans : – Cost would decline – Cost would be below the current contributions Plans closer to full funding would see less of a difference between current and new plan costs Plans closer to full funding would see less of a difference between current and new plan costs – Savings come from 30 year amortization of legacy costs

Pending Legislation Keep Our Pension Promises Act (S. 1631—Sanders, I- VT) Keep Our Pension Promises Act (S. 1631—Sanders, I- VT) – Would repeal benefit suspension provisions of MPRA – Would provide greater partition authority to PBGC and more financial resources to assist deeply troubled plans – Finance by limiting certain “tax breaks” in the Code, generating an est. $30 billion in revenue – Would raise multiemployer guaranty to 80% of Single guaranty for some participants – Problems: Clearly a “bailout” which Congress has repeatedly refused Clearly a “bailout” which Congress has repeatedly refused would explode current $52 billion deficit would explode current $52 billion deficit Would change bankruptcy priority, reducing access of contributing employers to credit Would change bankruptcy priority, reducing access of contributing employers to credit Required premium increase would ensure exodus of employers from system Required premium increase would ensure exodus of employers from system

Pending Legislation Pension Accountability Act (S. 2147—Portman, R- OH) Pension Accountability Act (S. 2147—Portman, R- OH) – Would make participant vote binding in all situations (no government override for systemically important plans). – Would count only returned ballots; unreturned ballots not counted as a “yes” vote. – Problems: Would virtually ensure fewer plans could be saved from insolvency Would virtually ensure fewer plans could be saved from insolvency No participant classes would be protected from massive cuts No participant classes would be protected from massive cuts Would hasten insolvency of PBGC Guaranty Fund and result in significantly lower benefits that could be paid from the multiemployer guaranty fund Would hasten insolvency of PBGC Guaranty Fund and result in significantly lower benefits that could be paid from the multiemployer guaranty fund Would increase amount of premium increase to be imposed on system and result in exodus of contributing employers Would increase amount of premium increase to be imposed on system and result in exodus of contributing employers

Next Steps Draft Language going through final revisions by Legislative Counsel Draft Language going through final revisions by Legislative Counsel Discussion continue with Agency staff to allay concerns Discussion continue with Agency staff to allay concerns Pressing ahead with member and staff education Pressing ahead with member and staff education Expect bill introduction in the next few weeks Expect bill introduction in the next few weeks Senate Finance Hearing set for March 8 Senate Finance Hearing set for March 8

Questions??? 21 Randy G. DeFrehn Executive Director Phone: Fax: Cell:

BY THE NUMBERS – CENTRAL STATES PROPOSED PENSION RESCUE PLAN 22.6% Average MPRA benefit reduction for all participants 22.6% Average MPRA benefit reduction for all participants 33.0% Percent of all Central States participants who will have NO IMPACT to their 33.0% Percent of all Central States participants who will have NO IMPACT to their pension benefits 12% The additional percent of UPS Transfer Group participants who will be made 12% The additional percent of UPS Transfer Group participants who will be made whole by UPS from MPRA reductions 27.0% Percent of retirees age 80+ with exemption from MPRA reductions 27.0% Percent of retirees age 80+ with exemption from MPRA reductions 14.0% Percent of retirees age with sliding scale MPRA reductions 14.0% Percent of retirees age with sliding scale MPRA reductions 41.0% Total percent of all Central States retirees who will receive some or complete 41.0% Total percent of all Central States retirees who will receive some or complete protection from MPRA benefit reductions due to age 5,000 Number of Central States participants protected from benefit reductions due to 5,000 Number of Central States participants protected from benefit reductions due todisability 74% Percent of surviving spouses with NO IMPACT to pension benefits due to age 74% Percent of surviving spouses with NO IMPACT to pension benefits due to age or disability 7.0% Average MPRA benefit reduction for surviving spouses 7.0% Average MPRA benefit reduction for surviving spouses TOTAL With MPRA ReductionsNo MPRA Reductions TOTAL With MPRA ReductionsNo MPRA Reductions Orphans (Tier 1) 43,400 28,400 15,000 All Other Participants (Tier 2) 315, , ,300 UPS Transfer Group (Tier 3) 48,000 46,900 1,100 TOTAL 407, , ,400

CONGRESSIONAL HEARINGS ON MULTIEMPLOYER PENSION PLANS "Examining Reforms to Modernize the Multiemployer Pension System" "Examining Reforms to Modernize the Multiemployer Pension System" Subcommittee on Health, Employment, Labor, and Pensions House Committee on Education and the Workforce Wednesday, April 29, 2015 “Private Employer Defined Benefit Pension Plans” Subcommittee on Select Revenue Measures, House Committee on Ways and Means September 17, 2014 "Strengthening the Multiemployer Pension System: How Will Proposed Reforms Affect Employers, Workers, and Retirees?" "Strengthening the Multiemployer Pension System: How Will Proposed Reforms Affect Employers, Workers, and Retirees?" Subcommittee on Health, Employment, Labor, and Pensions House Committee on Education and the Workforce Tuesday, October 29, 2013

CONGRESSIONAL HEARINGS ON MULTIEMPLOYER PENSION PLANS "Strengthening the Multiemployer Pension System: What Reforms Should Policymakers Consider?" "Strengthening the Multiemployer Pension System: What Reforms Should Policymakers Consider?" Subcommittee on Health, Employment, Labor, and Pensions Wednesday, June 12, 2013 "Challenges Facing Multiemployer Pension Plans: Reviewing the Latest Findings by PBGC and GAO" "Challenges Facing Multiemployer Pension Plans: Reviewing the Latest Findings by PBGC and GAO" Subcommittee on Heath, Employment, Labor, and Pensions House Committee on Education and the Workforce Tuesday, March 5, 2013 "Challenges Facing Multiemployer Pension Plans: Evaluating PBGC's Insurance Program and Financial Outlook" "Challenges Facing Multiemployer Pension Plans: Evaluating PBGC's Insurance Program and Financial Outlook" Subcommittee on Health, Employment, Labor, and Pensions House Committee on Education and the Workforce Wednesday, December 19, 2012

CONGRESSIONAL HEARINGS ON MULTIEMPLOYER PENSION PLANS "Assessing the Challenges Facing Multiemployer Pension Plans" "Assessing the Challenges Facing Multiemployer Pension Plans" Subcommittee on Health, Employment, Labor, and Pensions House Committee on Education and the Workforce Wednesday, June 20, 2012 "Examining the Challenges Facing PBGC and Defined Benefit Pension Plans" "Examining the Challenges Facing PBGC and Defined Benefit Pension Plans" Subcommittee on Health, Employment, Labor, and Pensions House Committee on Education and the Workforce Thursday, February 2, 2012 “Building a Secure Future for Multiemployer Pension Plans, Focusing on Long-Standing Challenges that Remain for Multiemployer Pension Plans”, Senate Committee on Health Education, Labor and Pensions May 27, 2010