IBEW / NECA National Benefits Conference January 31, 2013 Presented By: Randy G. DeFrehn Executive Director National Coordinating Committee for Multiemployer Plans 1 Recommendations of the Retirement Security Review Commission

January 30, 2013, 10:32 p.m. ET Some Unions Grow Wary of Health Law They Backed By JANET ADAMY and MELANIE TROTTMANJANET ADAMY MELANIE TROTTMAN

Overview Trends in Retirement Income Provision Trends in Retirement Income Provision Current Challenges Facing Multiemployer Plans Current Challenges Facing Multiemployer Plans Retirement Security Review Commission Retirement Security Review Commission Recommendations for Comprehensive Reform Recommendations for Comprehensive Reform

Shift from DB to DC Trend over past 30 years Trend over past 30 years Dominant among Corporate plans as the Primary Retirement vehicle Dominant among Corporate plans as the Primary Retirement vehicle – Driven by: Employers’ Desire to Shift Investment Risk Employers’ Desire to Shift Investment Risk Vastly reduce administrative cost & complexity Vastly reduce administrative cost & complexity Objective usually based on capital accumulation, not replacement income target Objective usually based on capital accumulation, not replacement income target – Complicates Retirement Planning – Eliminates Retirement for most low to Moderte Wage Workers DC Typically supplemental for most multiemployer plans DC Typically supplemental for most multiemployer plans

“Overall, union workers’ rate of participation in retirement at 80 percent—was greater plans—at 80 percent—was greater than that of nonunion workers, than that of nonunion workers, which was 48 percent.” Positive Correlation Between Union Representation and Pension Coverage

U.S. Department of Labor, Bureau of Labor Statistics…March 2009 The defined-benefit participation rate was 67 percent for union workers, more than triple the average rate of all private industry workers “The only surveyed group that had greater participation in defined-benefit plans than defined contribution plans was union workers. The defined-benefit participation rate was 67 percent for union workers, more than triple the average rate of all private industry workers.”

Why DB?

“… 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

Current Challenges

PPA Zones “Endangered” Status = Yellow Zone “Critical” Status= Red Zone

Renewed Focus on Unfunded Vested Liabilities

Not Your Grandfathers’ Withdrawal Liability Changing Environment in the Financial Services Industry Changing Environment in the Financial Services Industry – Tighter Funding Rules from PPA Higher Contributions to meet Rehabilitation and Funding Improvement Plans Higher Contributions to meet Rehabilitation and Funding Improvement Plans – Dodd – Frank Tighter Controls on Lending – FASB’ s New Disclosure Requirements – Credit Suisse, Rating Agency Critiques

What Can Be Done?

NCCMP “Retirement Security Review Commission”

Background Why Examine the Multiemployer System Now? Why Examine the Multiemployer System Now? – Funding rules sunset in 2014 – Unprecedented challenges Asset volatility Asset volatility Recession Recession Accounting / Ratings agency pressure Accounting / Ratings agency pressure – Last fundamental change to system was in 1980

Background Commission Overview Commission Overview – Met for over a year – Included Over 40 Organizations International unions International unions Employer trade groups Employer trade groups Individual large companies Individual large companies Multiemployer plans Multiemployer plans – Participating Industries Construction, trucking, retail food, entertainment, machinists, mining, bakery & confectionary, service Construction, trucking, retail food, entertainment, machinists, mining, bakery & confectionary, service

Background Process – Process – – First Monthly Meetings, Evolved to 2 days per month Plus Conference calls among work groups – Sought Expert Advice: Economists Economists policy researchers policy researchers investment professionals investment professionals Actuaries Actuaries representatives of non-US plans representatives of non-US plans

Background Core Principles Core Principles – Proposals must protect retirement income security for participants – Proposals must reduce or eliminate the financial risk to the sponsoring employers

Background Commission Focus Fell into Three Categories Commission Focus Fell into Three Categories – Preservation: Provisions to strengthen the current system Provisions to strengthen the current system – Remediation: Measures that target deeply troubled plans Measures that target deeply troubled plans – Innovation: Proposal for alternative plan design structure Proposal for alternative plan design structure

Background Commission Recommendations Are Additional Tools for Plans Commission Recommendations Are Additional Tools for Plans – Strictly Voluntary: Plans are not required to adopt any new provisions – Trustees of many plans need more flexibility to address challenges

Preservation

Provisions to Strengthen the Current System Allow Certain Yellow Zone Plans to Elect to Be in Red Zone Allow Certain Yellow Zone Plans to Elect to Be in Red Zone Extend certain red zone features to All Yellow Zone Plans Extend certain red zone features to All Yellow Zone Plans Ability to adjust benefits would remain limited to red zone plans Ability to adjust benefits would remain limited to red zone plans Establish Permanent Funding Relief Provisions Fashioned After Provisions Enacted Post-PPA Establish Permanent Funding Relief Provisions Fashioned After Provisions Enacted Post-PPA

Provisions to Strengthen the Current System Exclude additional contributions required by Funding Improvement or Rehab plans from being subject to withdrawal liability Exclude additional contributions required by Funding Improvement or Rehab plans from being subject to withdrawal liability Encourage Mergers and “Alliances” Encourage Mergers and “Alliances” Allow plans to harmonize normal retirement age with Social Security Allow plans to harmonize normal retirement age with Social Security

Remediation

Provisions For Deeply Troubled Plans Current Rules For the minority of plans (6 - 10% or approximately 90 – 150 plans) facing inevitable insolvency there is no early intervention option For the minority of plans (6 - 10% or approximately 90 – 150 plans) facing inevitable insolvency there is no early intervention option – Assets must be depleted and Benefits will be cut to PBGC maximum guarantee level Approximately $13,000 per year for full career (30 Year) employee who retires at age 65 Approximately $13,000 per year for full career (30 Year) employee who retires at age 65 – Ability of PBGC to support even this benefit level is in doubt

Net Position September 30, 2011($2.770 billion) 2011 Snapshot: Premium Income $92 million Investment Income $91 million Total Assets $1.807 billion New Liabilities($2.467 billion) Net Position September 30, 2012($5.237 billion Net Position September 30, 2012($5.237 billion) Key Statistics: PBGC Multiemployer Guaranty Fund Net Program Financials

“The Corporation estimates that, as of September 30, 2012, it is reasonably possible that multiemployer plans may require future financial assistance of approximately $27 billion.” “The Corporation estimates that, as of September 30, 2012, it is reasonably possible that multiemployer plans may require future financial assistance of approximately $27 billion.” PBGC Annual Report 2012

Provisions For Deeply Troubled Plans Commission Recommends that if : Commission Recommends that if : a)A plan has taken all reasonable measures to improve funding b)Insolvency is still inevitable c)It is possible to avoid insolvency and preserve benefits above the PBGC maximum guarantee level Then the Adjustable Benefit authority granted to trustees under PPA should be extended to permit suspension of a portion of the accrued benefits Then the Adjustable Benefit authority granted to trustees under PPA should be extended to permit suspension of a portion of the accrued benefits

Provisions For Deeply Troubled Plans Key Considerations Key Considerations – Preserving benefits above PBGC guarantee is preferable to insolvency – Early Intervention will allow some plans to survive for future generations – Troubled plans may choose to use this tool based on their individual circumstances and philosophy

Provisions For Deeply Troubled Plans Criteria for accessing Benefit Suspension Tool: Criteria for accessing Benefit Suspension Tool: – Insolvency projected within: 15 years 15 years 20 years if active to inactive ratio exceeds 2:1 20 years if active to inactive ratio exceeds 2:1 – Plan has taken all reasonable measures to avoid insolvency – After application of suspensions, plan is projected to be solvent

Provisions For Deeply Troubled Plans Suspension Limitations Suspension Limitations – Benefits must be preserved at no less than 110% of PBGC guarantee – Suspensions must be no greater than is necessary to avoid insolvency – Any future benefit increases must be accompanied by a comparable restoration of suspended benefits

Provisions For Deeply Troubled Plans Participant Protections Participant Protections – PBGC approval is required – Application must describe: Measures taken to improve funding Measures taken to improve funding Summary of proposed suspensions Summary of proposed suspensions – PBGC has 180 days to consider application Trustee due diligence will be granted great deference Trustee due diligence will be granted great deference PBGC inaction will be a deemed approval PBGC inaction will be a deemed approval

Innovation

Alternative Plan Design Structure Current Available Options Do Not Meet Needs of All Groups Current Available Options Do Not Meet Needs of All Groups – Defined Benefit Plan – Employers find market risk unacceptable – Defined Contribution Plan all risk rests with participant all risk rests with participant highly inefficient vehicle for retirement security highly inefficient vehicle for retirement security Parties should have ability and be encouraged to develop new flexible models Parties should have ability and be encouraged to develop new flexible models

Alternative Plan Design Structure Commission Approach Commission Approach – Avoid DB vs. DC Jargon – Overall Commission Principles Secure retirement income Secure retirement income Reduce risk to employers Reduce risk to employers

Alternative Plan Design Structure Commission Approach Commission Approach – Attract and retain employers – Promote creative plan designs Innovation is encouraged – Flexible alternatives include, but are not limited to: Innovation is encouraged – Flexible alternatives include, but are not limited to: – Variable DB plans (Cheiron/UFCW Design) – Target Benefit Plans (similar to Canadian Plans)

Alternative Plan Design Structure Variable Defined Benefit Plan Variable Defined Benefit Plan – Generally fits current DB definition – Comprised of two component parts Core Benefit Core Benefit Variable Benefit Variable Benefit – Operates under Current Law

Alternative Plan Design Structure Variable Defined Benefit Plan Variable Defined Benefit Plan – Core Benefit is determined using a low assumed rate of return (e.g. 5%) – Variable Benefit is derived from earnings in excess of Core Can be increased in good years or reduced in years of poor investment performance but benefit cannot go below Core Benefit Value Can be increased in good years or reduced in years of poor investment performance but benefit cannot go below Core Benefit Value Participants are assigned “Shares” Participants are assigned “Shares” – Number of Shares are definitely determinable – Value of Shares is variable

Alternative Plan Design Structure Variable Defined Benefit Plan Variable Defined Benefit Plan – Employers remain subject to withdrawal liability as under current rules – Likelihood of incurring liability greatly reduced through conservative management of investments – Can be further reduced by purchase of annuities on retirement – Covered by PBGC Multiemployer Guaranty Fund

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – Operates like but is technically not a defined benefit plan – Neither DB nor DC plans under current code definitions – Designed as a better alternative to moving to current DC design

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – addresses Shortcomings of defined Contribution plans Benefits are paid as lifetime annuities Benefits are paid as lifetime annuities Pooling of longevity risks Pooling of longevity risks Ability to Negotiate Fees comparable to current DB fees Ability to Negotiate Fees comparable to current DB fees Asset diversification to enhance returns Asset diversification to enhance returns

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – Eliminates withdrawal liability – Funding standards more conservative than current system – Trustees have increased ability to adjust benefits in event of funding distress – Options depend upon plans’ current Funding level – appropriate protections for vulnerable populations

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – Plan minimum contributions determined by plan actuary – Would permit diverse investments to allow participation in market gains – Builds in participant protections by requiring funding at 120% of expected costs

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – Funding adequacy determined by 15 year projection – Benefit adjustments are required at various points based on current funding and 15 year projection – Additional protections are possible through portfolio immunization and purchase of annuities

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – If a plan fails to meet the long term funding requirements, Trustees are to take corrective actions based on hierarchy of adjustment options – Self Correcting feature distinguishes this design from DB plan – Since PBGC Guaranty Fund only insures DB plans, the Target Plan would not be covered

Alternative Plan Design Structure Target Benefit Plan Target Benefit Plan – As a last measure, in the event of a catastrophic event the core (non-ancillary) benefits of pensioners can be reduced – Reductions subject to protections for vulnerable populations in deeply troubled plans including PBGC oversight

Alternative Plan Design Structure Key Concepts Key Concepts – Eliminating Withdrawal Liability can remove current employer incentives to leave – For most plans, withdrawal liability is not a significant source of contribution income

Alternative Plan Design Structure Key Concepts Key Concepts – Goal of flexible plans is to focus on benefit security Will both preserve and strengthen worker retirement security by: Will both preserve and strengthen worker retirement security by: – willingness of current employers to remain in the system and for new ones to enter – Prudent and conservative management by the trustees

Alternative Plan Design Structure Transition Transition – Adjustable benefit provisions apply prospectively only to credit earned after adoption – Parties migrating to a flexible benefit design would have access to extended amortization of legacy liabilities

Alternative Plan Design Structure Transition Transition – Current rules remain in effect for legacy costs PPA zone statuses PPA zone statuses Minimum funding standards Minimum funding standards Withdrawal liability Withdrawal liability Benefit protections Benefit protections PBGC Guarantees Apply (to the extent they remain available) PBGC Guarantees Apply (to the extent they remain available)

Alternative Plan Design Structure Transition Transition – Accruals in current plan would ceases, and accruals in new plan would begin – New and old plan can have same provisions – Contributions are allocated between legacy benefits and future benefits – Longer amortization allowed in legacy plan to ease transition

Next Steps Determine Legislative vs. Regulatory Paths Determine Legislative vs. Regulatory Paths Draft proposed language Draft proposed language Develop sophisticated Messaging Program Develop sophisticated Messaging Program Educate Congressional Committee Members and Staff and Regulators Educate Congressional Committee Members and Staff and Regulators PPA rules sunset at the end of 2014 – another election year PPA rules sunset at the end of 2014 – another election year Target for Congressional Action

Questions??? 55