In Search of Greater Retirement Security Essential Elements of Composite Retirement Plans Presented to: Cornell University ILR School Labor and Employment Law Program June 29, 2016 By: Randy G. DeFrehn Executive Director National Coordinating Committee for Multiemployer Plans

Innovation Remaining Provision to Comprehensive Pension Reform– New Plan Designs Left Out for Jurisdictional Reasons Proposal would encourage the adoption of alternatives to current DC plans Offered two examples – Variable DB and “Target” or “Composite” plans Today’s Focus is on Composite Plans

Comparable to Other “Shared Risk” 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 Think of it as “DC plus” rather than “DB minus “ New “composite” plans to consist of two parts: past service previously accrued under existing DB rules and Future service under new “adjustable” system

Composite (Target) Benefit 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 Designed as a better alternative to moving to current DC design The reason for the change is that this is a form of a defined contribution plan which looks very much like benefit structures seen in Canada and parts of Europe, but does not use an individual account. The structure has been modeled to address the kinds of issues mentioned in the NIRS Study “A Better Bang for the Buck.”

Composite (Target) Benefit Plan 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 improves returns

Composite (Target) Benefit Plan 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 Adjusting benefits incrementally will prevent funding distress Options depend upon plans’ current and projected funding levels

Composite (Target) Benefit Plan Enhances retirement security by removing obstacles to organizing new participating employers Funding adequacy determined by 15 year actuarial projection Benefit adjustments are required at various points based on current funding and 15 year projection In the final analysis, the use of these new plan designs will provide better long-term retirement security by removing obstacles to new employer organizing, expanding the number of contributing employers rather than seeing them continually shrink.

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 1. Traditional Response Negotiate higher contributions, or modify future accrual rates and notify participants of possible implications 2. When that is not feasable Can modify non-core pension benefits (anything but normal retirement benefit including post-retirement benefit improvements, other PPA adjustable benefits)

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 also be reduced

Protections to Preserve Legacy Plan Funding 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 [*Contribution would be the greater of these two] The thirty year amortization is critical so that an adequate benefit can be maintained for currently active employees – funded at the higher level to moderated market volatility. This is another aspect of the need to balance interests of all stakeholders to provide long-term retirement security.

Protections to Preserve Legacy Plan Funding Elimination of Withdrawal Liability: 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* *Absent this “Bridge” plan sponsors have an incentive to 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 it was found that: 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 Savings come from 30 year amortization of legacy costs

Is the Composite Model Right for Everyone? Targeted to plans where the alternative is to abandon the DB plan and replace it with a 401(k) Design is self-limiting Poorly funded plans are unlikely to afford contributions using the Transition Minimum Contribution May also be affected by ultimate decision on Fresh Start Amortization

Cornell University ILR School MULTIEMPLOYER PENSION PLANS IN CRISIS: Is the Composite Plan the Answer? June 29, 2016 Diane Gleave

Effective Minimum Funding Periods Effective Amortization Period (Years) Zone # of Plans Average 25th Pct 50th Pct 75th Pct Green 171 13.87 8.84 11.15 14.60 Yellow 26 16.16 11.42 14.19 17.47 Red 58 10.31 7.50 8.96 12.64 Total 255 13.29 8.57 11.07 14.49 Based on Segal’s study from May 2016 using readily available information from 255 plans.

Cost of Composite Plan vs. Current Plan 100%+ 100% – 90% 90% – 80% 80% – 70% 70% – 60% <60% On average, composite plans will need 33% less funding Based on Segal’s study from March 2015 using readily available information from 106 plans.

Composite Plan Cost vs. Current Plan Contributions 100%+ 100% – 90% <60% 90% – 80% 80% – 70% 70% – 60% Contributions are not always tied to the cost. At the median, composite plan will require 90% of current contributions Based on Segal’s study from March 2015 using readily available information from 106 plans.