In yesterday’s KCS Blog post, “No More Excuses”, we touched on the fact that CBO scoring for the Butch Lewis Act legislation showed only a $34 billion price tag down substantially from the original $101 billion calculated last year. Our friends at Cheiron (outstanding actuarial firm) have shared the following with us.

The CBO scoring came in at $34 billion, and reflects the following changes:

1. Eligibility: the pension plan must be in critical and declining (C&D) status as of implementation date, or be critical as of the same date, but have a funded ratio of under 40% and the ratio of actives to in-actives is under 40%.
2. PBGC financial assistance will not kick in until the plan is within 5 years of insolvency. This reduced the scoring significantly.
3. The loan amount will be for Retirees and Term Vesteds (this is new).
4. To incentivize the plans to pay back the loan, they will be offered two loan repayment options at the front end; either accept the 30-year interest with a balloon payment at the end, or 20 years of interest, with the loan then being amortized over the last ten years. Plans choosing the latter payback option will enjoy a 50 bps reduction in the loan repayment interest rate throughout the term of the loan.
5. The maximum interest rate on any loan will be 20 bp above the prevailing 30 year Treasury bond rate.
6. The PBGC will be able to recommend merger that they see fit, plans that do not want to merge will need to show why remaining independent would be in the best interests of plan participants.

The most significant changes, as we see, are the PBGC’s support being withheld until a plan is within 5 years of insolvency, the opportunity to repay the loan earlier and at a reduced interest rate, and the fact that the PBGC could recommend merging two or more plans.

We touched on the repayment options yesterday, but the possibility of receiving a loan with a 50 basis point discount is meaningful. It is too soon to know how many of the critical and declining plans would seek this option, but I would hope that a majority would be in a position to elect the accelerated payment schedule.

Cheiron mentioned that the CBO scoring was impacted significantly by the fact that the PBGC will withhold funds until a plan is within 5 years of insolvency under this new proposal. I have not seen the math behind this aspect of the revised bill to be able to comment on this provision. However, I am concerned that not having the assets in the fund from day one and growing at the projected ROA of 6.5% seems potentially harmful to the ultimate success of the loan program. But, then again, placing the PBGC assets into a traditional asset allocation more than 9 1/2 years into an equity bull market may be worse.  We’ll see if we can get a better handle on this revised language.

Lastly, the PBGC’s ability to recommend merging pension plans together is interesting. We, at KCS, are not sure at this time what the criteria are to make such a suggestion, but once the recommendation is made the onus falls on the plan sponsor to say why it doesn’t make sense for their plan. We often highlight the fact that municipal and state pension systems would benefit from greater economies of scale by combining pension systems.  Is this any different?