Round Two

I am pleased to report that the Butch Lewis Act presentation to the Senate staff went well yesterday. This follows the presentation to the House staff last Friday. Both meetings were well attended, and the audience was engaged while asking many good questions. Importantly, these presentations were delivered prior to the first meeting being held by the Joint Select Committee on the Insolvency of Multiemployer plans, which is to meet today in Washington DC.

The Butch Lewis Act should be the foundation of any legislation that emanates from this Committee. There are many benefits to this legislation.  But first and foremost it is intended to preserve and protect the pension benefits for roughly 3.5 million plan participants currently in plans designated as “Critical and Declining”. Furthermore, it is the only proposed legislation that does not call for a benefits reduction.

 

Benefits from the Butch Lewis Act and the Pension Rehabilitation Administration

Enhances Solvency while reducing risk

  •        Maintains current benefit levels
  • Secures Retired Lives thru Defeasance strategy (100% funded)
  • Defeasement funded thru PRA loan (and in a few cases the PBGC)
  • A Significant shift within the Plan’s asset allocation to greater use of fixed income

Reduces Cost to fund Retired Lives

  •        Three possible strategies to defease the Retired Lives
  •        Cash Flow Matching, Duration Matching, and Annuities
  •        Cash Flow Matching approximately 9% less costly than Annuities
  •        Asset Management fees reduced from 30-40 bps on average to 10 bps

Buys Time for the pension plan and plan participants

  •        Current assets + contributions fund Active Lives + PRA Loan
  •        Much longer liabilities than Retired Lives
  •        Given time, risky assets tend to perform (capture liquidity premium)

Reduces ROA Hurdle Rate

  •        Replaces Retired Lives ROA (@7.50%) with PRA Loan (@3%)
  •        Defeasement cost savings transferred to current assets
  •        Asset management fee savings supports current assets
  •        The savings help fund future liabilities and the repayment of the loan

PRA Loan Should be Profitable

  •        PRA receives 30-year Treasury financing (@3%) into Trust Fund
  •        Trust Fund provides PRA loans at 25 bps yield spread profit
  •        25 bps spread = $2.5 million profit margin per $1 billion loan
  •        $60 billion PRA loans = $150 million profit margin annually

On the other hand, the Butch Lewis Act is neither a “bail-out” nor a windfall for Wall Street. These loans must be paid back, and current contribution levels must be sustained or there are severe withdrawal penalties levied on the plans/employers.  In addition, the significant shift within the plan’s asset allocation toward greater use of fixed income will significantly reduce asset management fees. For most of these plans, Retired Lives make up more than 50% of the liabilities, which means that more than 50% of the assets will now be allocated to fixed income, which carries much lower average asset management fees than do equities, real estate, alternatives, etc.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s