An acquaintance of mine recently shared with me an article from The Hill, titled, “Multiemployer Pension Bailout Plan Is Fatally Flawed”. Renowned economist, Olivia Mitchell, Economics professor at the Wharton School of the University of Pennsylvania, wrote the article. Much of what she highlights as issues pertain to the broader multiemployer pension space and are not relevant to the argument as to whether or not H.R. 397 should or shouldn’t be supported. Unfortunately, we are not working with a clean slate at this time and as a result, we cannot wipe away years of actions and decisions that have contributed to today’s pension crisis. If we could, I would agree with many of her suggested actions.
H.R. 397 (aka the Butch Lewis Act) would provide a lifeline to more than 120 Critical and Declining (C&D) multiemployer plans that provide (or will) benefits to more than 1 million Americans. A collapse of these plans and their subsequent move to the Pension Benefit Guaranty Corporation (PBGC) would provide pennies on the dollars to these pensioners. Fortifying these plans through the proposed loan program would keep taxpayers from having to support a very expensive pay as you go social safety net. Furthermore, Ms. Mitchell complains that some of these plans may not be able to pay back the loan in 30 years or may have to renegotiate the terms. Are you kidding me? Countries, corporations, and individuals renegotiate terms of their loans all the time. Why should this be a basis for sabotaging this legislation?
In addition to her concern about a potential default 30 years from now, she also raises several other concerns. Ms. Mitchell claims that the legislation doesn’t prohibit benefit enhancements. She is wrong. Section 4, Loan program for multiemployer defined benefit plans, subsection B Loan terms, paragraph 3A as a condition of the loan, the plan sponsor stipulates that— (A) except as provided in subparagraph (B), the plan will not increase benefits, allow any employer participating in the plan to reduce its contributions, or accept any collective bargaining agreement which provides for reduced contribution rates, during the 30-year period. Furthermore, paragraph B has to do with reinstating benefit cuts in plans that have filed for relief under MPRA.
The legislation contemplates a new course for the plans and their sponsors. Any plan taking a loan must defease the retired lives and the terminated vested liabilities. This reduces risk in the process. Furthermore, the determination of the loan amount is predicated on a true mark-to-market of those liabilities. U.S. Treasury STRIPS will be used to determine the true liability. The defeasance strategies that will be considered use in two of the 3 cases Corporate bonds which significantly out-yield Treasury STRIPS providing for additional assets that can be used to meet future liabilities (Active Lives).
Importantly, the defeasance of retired and terminated vested liabilities addresses the near-term liabilities and as such, extends the investing horizon for the balance of the Active Lives. This extended time horizon is an important investing tenet. The predictability of returns over a 15-year or longer time horizon will allow the remaining assets to capture the liquidity premium that exists in equities and alternative assets.
Again, if we had a clean slate and we were creating a multiemployer pension system starting from day one we would agree with her that all liabilities should be priced at a true mark-to-market rate, that PBGC premiums be greater, that benefits not be enhanced until the current promises are met, and that exiting companies pay their fair share of what is owed and not leave the liability to the surviving sponsors, but alas we are where we are and protesting that this legislation doesn’t address these issues is a non-starter.
We cannot kick this pension crisis down the road any longer. Furthermore, in an attempt to address this situation we must not enact legislation that harms currently “healthy” plans by increasing their costs either through a significant reduction in the discount rate currently used or a dramatic increase in PBGC premiums. We have an opportunity through the Federal Government to provide a lifeline of 30-years. Much can happen during that time period. Nothing good happens if we let these C&D plans collapse, causing bankruptcies and reduced pension benefits under the PBGC. If you are concerned about the taxpayers then doing nothing puts them on the hook to support the federal social safety net far sooner than if we try a loan program.