While the majority of multiemployer plans appear primed for gradual recovery as the economy improves, a minority of such plans will not be able to recover using the tools and authority provided by the Pension Protection Act of 2006 (PPA; P.L. 109-280), according to Joshua Gotbaum, director of the Pension Benefit Guaranty Corporation (PBGC). Gotbaum testified on December 19, 2012 before the Health, Employment, Labor, and Pensions Subcommittee of the House Committee on Education and the Workforce. Gotbaum told the subcommittee that many “critical status” plans (and some “seriously endangered status” plans) are severely distressed and will need still further provisions to remain viable.
Congressional support for multiemployer plans
Congress has acted repeatedly to help reduce the strains on multiemployer plans and provide contribution flexibility, Gotbaum noted. In 2004, certain plans were permitted to defer the charges related to one-time investment losses; in 2008, plans could elect to delay implementation of PPA requirements for one year; and in 2010, funding relief allowed many plans to lessen the impact of 2008 investment losses on their funded status and contribution requirements. Plans relied extensively on this relief as they tried to regain their footing, he said.
PPA required annual plan certifications based on standardized funding and liquidity measures for determining the financial health of plans. Plans in serious financial distress are identified as in “critical” (“red”) status, and plans experiencing some financial difficulty are identified as in “endangered” (“yellow”) status or “seriously endangered” (“orange”) status. Plans not experiencing financial difficulty are categorized as non-distressed (“green”) status. After the tubulence of 2008, Gotbaum said, the PPA steered many plans toward an improved funded status. He also noted that the funding relief provided under the Pension Reform Act of 2010 (P.L. 111-192) also helped.
Severely distressed plans need more help
At the beginning of the 2008 plan year, only 12% of all plans were in critical or seriously endangered status. That number spiked to 44% of all plans at the beginning of the 2009 plan year. In 2010, nearly one-third of all plans continued to be in critical or seriously endangered status. “A substratum of critical and seriously endangered status plans is beyond the point of recovery without significant changes in the rules that govern their operations,” Gotbaum told the subcommittee. These plans tend to operate in declining industries – such as furniture manufacturing, textiles, or typesetting, or in intensely competitive markets, from which large numbers of employers have gone out of business. Their participant populations are mature, with a large proportion of retirees and significant unfunded retiree liabilities, Gotbaum said.
There are several differences between the PBGC’s single-employer insurance program and its multiemployer program, Gotbaum noted. For instance, unlike the single-employer program, when multiemployer plans are in distress, the PBGC generally can take no action until the plans have entirely run out of money and are insolvent. PBGC multiemployer benefit levels are very different and multiemployer premiums are much lower. The result, he said, is that the multiemployer system is strained.
For several years, Gotbaum said, multiemployer plans, participating employers, unions, actuaries, plan professionals and others have been discussing various changes to the multiemployer system that would preserve plans by providing them greater flexibility to address various challenges. Several are now planning to present proposals to both the Congress and the Administration in the coming months, he said.
“The basic contours of the program have not been modified in more than 30 years,” Gotbaum said. “Some of the tools and authorities the statute provides that might be useful in certain circumstances are not useable in practice because of the agency’s lack of financial resources. Both the program and PBGC’s finances should be analyzed as part of and in the context of the broader changes for multiemployer plans generally,” Gotbaum concluded.
Source: Testimony of Joshua Gotbaum, PBGC Director before the Health, Employment, Labor and Pensions Subcommittee House Committee on Education and the Workforce, December 19, 2012.
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