1. PBGC Advisory Committee
Recommendations for Multiemployer Pension Reform
Findings of the NCCMP Retirement Security Review Commission
Presented to:
PBGC Advisory Committee P
November 29, 2012
By:
Randy G. DeFrehn
Executive Director
NCCMP

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

3. Trends

4. Collapsing Pillars Three Pillars of Retirement Security:
Social Security
Private Pensions
Personal Savings

5. Declines in Coverage
61.8% of all Full Time Employees Work for an Employer That Sponsors a Retirement Plan
Down almost 8% from 1999
Participation by workers between ages 21 and 64 with access is 54.4%
Down 6.0% Since1999
For All Workers (including those without access to an employer sponsored plan) Participation dropped to 39.6%
below 40% for the First time in 15 years
Source: EBRI Survey

6. Retirement Shortfall
Estimated at $4.55 Trillion For all workers ages 36 to 65
based on covering necessities, not maintaining ones’ standard of living
Average $47,732 per person
Variances by age, gender and marital status
When accounting for health care and nursing home costs:
Single males - $80,165
Single Females - $94,157

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

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

9. U.S. Department of Labor, Bureau of Labor Statistics…March 2009
“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.”

10. Why DB?

11. The More Efficient Approach
“… 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
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.”

12. Key Statistics: PBGC-Insured Plan Participants
Sources: PBGC Premium Filings.
2010 figures are estimates from PBGC internal calculations estimates reported last year have been updated to reflect actual premium filings.
Due to rounding of individual items, numbers may not add up to totals.

13. Key Statistics: Multiemployer Plan Participants by Status
Non-Active Employees Include Retired and Terminated Vested Pension Plan Participants
Source: Bruce Perlin, PBGC, October 10, 2012, NCCMP Annual Conference

14. Declining Number of Multiemployer Plans Primarily Through Mergers
Key Statistics:
Declining Number of Multiemployer Plans Primarily Through Mergers
Sources: PBGC Annual Reports and internal calculations.
A number of plans received financial assistance in more than one year.
2011 figures rounded.
Total for plan columns represents the total number of multiemployer plans that ever received the stated type of financial assistance from PBGC's Multiemployer Insurance Program.

15. Key Statistics: Financial Assistance to Insolvent Multiemployer Plans Have Been Rare
Sources: PBGC Annual Reports and internal calculations.
A number of plans received financial assistance in more than one year.
2011 figures rounded.
Total for plan columns represents the total number of multiemployer plans that ever received the stated type of financial assistance from PBGC's Multiemployer Insurance Program.

16. Current Challenges

22. Focus on Unfunded Vested Liabilities

23. Not Your Grandfathers’ Withdrawal Liability
Changing Environment in the Financial Services Industry Has Changed the World for Employers
Tighter Funding Rules from PPA
Higher Contributions to meet Rehabilitation and Funding Improvement Plans Causing Withdrawal Liability to Rise

24. Not Your Grandfathers’ Withdrawal Liability
Changing Environment in the Financial Services Industry Has Changed the World for Employers
Tighter Funding Rules from PPA
Higher Contributions to meet Rehabilitation and Funding Improvement Plans Causing Withdrawal Liability to Rise
20 Year Cap Creates Incentives to Leave

25. Not Your Grandfathers’ Withdrawal Liability
Changing Environment in the Financial Services Industry Has Changed the World for Employers
Tighter Funding Rules from PPA
Higher Contributions to meet Rehabilitation and Funding Improvement Plans Causing Withdrawal Liability to Rise
20 Year Cap Creates Incentives to Leave
Dodd – Frank Tighter Controls on Lending

26. Not Your Grandfathers’ Withdrawal Liability
Changing Environment in the Financial Services Industry Has Changed the World for Employers
Tighter Funding Rules from PPA
Higher Contributions to meet Rehabilitation and Funding Improvement Plans Causing Withdrawal Liability to Rise
20 Year Cap Creates Incentives to Leave
Dodd – Frank Tighter Controls on Lending
FASB’ s New Disclosure Requirements

27. FASB’s New Disclosure Requirements

28. Forgive Them Lord, for They Know Not What They Do….
FASB’s New Disclosure Requirements
Forgive Them Lord, for They Know Not What They Do….

29. Not Your Grandfathers’ Withdrawal Liability
Changing Environment in the Financial Services Industry Has Changed the World for Employers
Tighter Funding Rules from PPA
Higher Contributions to meet Rehabilitation and Funding Improvement Plans Causing Withdrawal Liability to Rise
20 Year Cap Creates Incentives to Leave
Dodd – Frank Tighter Controls on Lending
FASB’ s New Disclosure Requirements
Credit Suisse, Rating Agency Critiques

30. “We estimate multiemployer pension plans in the U. S
“We estimate multiemployer pension plans in the U.S. are $369 billion underfunded (52% funded)…”

31. “On an actuarial basis the median multiemployer pension plan was 85% funded…”

32. Wrong…
PPA Changed the way Single employer plans value their liabilities, reduced smoothing and used a compressed amortization period.
Congress chose NOT to apply these standards to multiemployer plans
Multiemployer Plans are ongoing entities and it is inappropriate to use a termination valuation basis to determine outstanding liabilities

33. Wrong…
While in some ways a 2 edged sword, multiemployer plans are different
Much more stable than singles
Are not predicated on the health of any one contributing employer
Are funded pursuant to multi-year bargaining agreements
Many if not most of the costs to fund liabilities come from the existing wage package
Require Withdrawal Liability from Some Departing employers (industry rules)

34. What Can Be Done?

35. NCCMP “Retirement Security Review Commission”

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

37. Background Commission Overview First meeting in August 2011
Includes Over 40 Organizations
International unions
Employer trade groups
Individual large companies
Multiemployer plans
Participating Industries
Construction, trucking, retail food, entertainment, machinists, mining, bakery & confectionary, service

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

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

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

41. Background 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

42. Preservation

43. Provisions to Strengthen the Current System
Allow Certain Yellow Zone Plans to Elect to Be in Red Zone
Must be projected to enter red zone in next 5 years
Allows early access to all red zone tools
Plan would be considered critical for participant notice purposes
Surcharges would not apply
Use is optional for plans

44. Provisions to Strengthen the Current System
Extend certain red zone features to All Yellow Zone Plans
Excise tax protection
Ability to accept lower contribution rates
Greater ability to improve benefits if experience allows
Ability to adjust benefits would remain limited to red zone plans

45. Provisions to Strengthen the Current System
Establish Permanent Funding Relief Provisions Fashioned After Provisions Enacted Post-PPA
Provisions would trigger following a sharp market decline
30-year amortization of losses
5-year amortization extension
Enhanced asset smoothing
Use of these relief measures would be optional for plans

46. Provisions to Strengthen the Current System
Other Technical Enhancements
Change Funding Target Starting point to certification date for Funding Improvement Plan (Removes Uncertainty of Predictions)
Treats Single and Multiemployer Plan Survivors equally in Determining who is eligible for PBGC pre-retirement survivor benefits

47. Provisions to Strengthen the Current System
Other Technical Enhancements
Resolves ‘Revolving Door’ problem for Entry into /Exit from Critical Status
Allow Plans to determine terms re: CBA renewals while in a zone
Assigns priority to Zone Rules over Reorganization rules to resolve Conflicts
Addresses ‘No Action’ yellow zone plans
Contribution Increases required for FIP/RP disregarded for Withdrawal Liability purposes

48. Provisions to Strengthen the Current System
Mergers and Alliances
Encourage PBGC to facilitate mergers
Allow “Alliances” where Stronger plans may ally with weaker plan to provide economies of scale without taking on legacy costs
Similar to provisions introduced in both Pomeroy / Tiberi and Casey bills

49. Provisions to Strengthen the Current System
Allow plans to harmonize normal retirement age with Social Security
Non-retired participants only
Participants within 10 years of normal retirement protected
Available to all plans, regardless of funded position
Use of provision is optional – no obligation for plans to change

50. Provisions to Strengthen the Current System
Other suggestions to strengthen plans
Federal backing for bond offerings use to fund plans
Enhanced tax deductions for contributions above minimum
Allow plans to opt-out of PBGC guarantee in exchange for present value of the guarantee

51. Remediation

52. Provisions For Deeply Troubled Plans
Current Rules
For the minority of 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
Ability of PBGC to support even this benefit level is in doubt

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

54. PBGC Annual Report 2012
“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.
As of September 30, 2010 and 2009, these exposures were estimated at approximately $23 billion and $20 billion, respectively. The significant increase in FY 2012 from prior years is due primarily to new data received for two particularly large plans; and the decrease in interest rates for valuing liabilities. “
one plan, with a net liability of $20 billion, is in the ―transportation, communication, and utilities industry category;
the other, with a net liability of $6 billion, is in the ―agriculture, mining, and construction industry category
Source: PBGC 2012 Annual Report, P. 51.

55. Provisions For Deeply Troubled Plans
Commission believes that if all of the following are true:
A plan has taken all reasonable measures to improve funding
Insolvency is still inevitable
It is possible to avoid insolvency and preserve benefits above the PBGC maximum guarantee level
Then the trustees should have the authority to suspend a portion of the accrued benefits

56. Provisions For Deeply Troubled Plans
Key Considerations
Preserving benefits above PBGC guarantee is preferable to insolvency
Will allow some plans to survive for future generations
Protections are needed for especially vulnerable populations
Troubled plans may choose to use this tool based on their individual circumstances and philosophy

57. Provisions For Deeply Troubled Plans
Criteria for accessing Benefit Suspension Tool:
Insolvency projected within:
15 years
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

58. Provisions For Deeply Troubled Plans
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

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

60. Plans are Adopting Alternative Allocation Rules
Alternative allocation rules are for withdrawal liability
Splitting of plans’ Unfunded Vested Benefits (UVBs) between “new employers” and “old employers”
“new employer” UVBs: liabilities associated with service with employers that first participate in the plan after a certain date less assets attributed to the new employers
“old employer” UVBs: the plan’s total UVBs less the UVBs in the “new employer” pool to assure 100% allocation of UVBs
Separate pools are only for purposes of withdrawal liability; The plan continues to have a single funding standard account
Source: PBGC Presentation at NCCMP Conference, October 2012

61. Innovation

62. Alternative Plan Design Structure
Commission Believes that Current Available Options Do Not Meet Needs of All Groups
Defined Benefit Plan – Employers unwilling to accept market risk
Defined Contribution Plan – Highly inefficient vehicle for retirement security
Parties should have ability and be encouraged t to develop new “Flexible models”

63. Alternative Plan Design Structure
Commission Approach
Avoid DB vs. DC Jargon
Overall Commission Principles, Proposals must:
protect retirement income security for participants
reduce or eliminate the financial risk to the sponsoring employers

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

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

66. Alternative Plan Design Structure
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
Participants are assigned “Shares”
Number of Shares are definitely determinable
Value of Shares is variable

67. Alternative Plan Design Structure
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

68. Alternative Plan Design Structure
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

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

70. Alternative Plan Design Structure
Target Benefit Plan
Absence of 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

71. Alternative Plan Design Structure
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

72. Alternative Plan Design Structure
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

73. Alternative Plan Design Structure
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

74. Alternative Plan Design Structure
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 similar to those provided for deeply troubled plans including PBGC oversight

75. Alternative Plan Design Structure
Key Concepts
Eliminating Withdrawal Liability can remove current employer incentives to leave
Will both preserve and strengthen worker retirement security
For most plans, withdrawal liability is not a significant source of contribution income
Goal of flexible plans is to focus on benefit security from:
willingness of employers to enter and remain in plans
Prudent and conservative management by the trustees

76. Alternative Plan Design Structure
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

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

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

79. Target for Congressional Action - 2013
Next Steps
Determine Legislative vs. Regulatory Paths
Draft proposed language
Educate Congressional Committee Members and Staff and Regulators
PPA rules sunset at the end of 2014 – another election year
Target for Congressional Action

80. Questions???