K.I.S.S.

Why must politicians always complicate a problem that has a rather simple solution? H.R. 397 passed the House with bipartisan support in July. Unfortunately, nothing has been done in the Senate to pass this important legislation needed to protect the promised retirements to so many hard-working Americans. Regrettably, we get a proposed piece of legislation from Republican Senators Grassley and Alexander, that takes the simple solution that addresses the needs of the roughly 125 Critical and Declining plans and proposes onerous changes to all multiemployer plans that might very well thrust a significant percentage of healthier plans into a funding crisis.  Why? What is the ulterior motive?

As we’ve discussed, the current array of Critical and Declining plans have a significant negative cash flow.  They need a lifeline, as these plans can not invest their way to solvency.  H.R. 397 proposes a loan program that would force plans to calculate how much it would need to fully defease the plan’s current retired lives.  They would then borrow the money through a government agency called the Pension Rehabilitation Administration (PRA).  The retired lives are defeased, while the current assets of the plan and any future contributions would go to funding the future liabilities, interest payment, and the principal loan repayment (30-year maturity). The investing horizon has been dramatically lengthened providing for a much longer investment horizon for less liquid assets to capture the liquidity premium. Simple!

The roughly 90% of multiemployer plans that are not in C&D status would continue to operate under the current rules. Have they always done everything right – NO! But, we have an immediate need to fix those plans that are in dire straights so that roughly 1.4 million Americans don’t lose their economic freedom.

However, as we previously stated, Washington DC doesn’t like simple! Instead of focusing on the crisis at hand, Grassley and Alexander want to “fix” every plan, whether they need it or not. Instead of providing loans that would extend the viability of these plans by 30 years, they prefer to have these plans fail and ultimately become the responsibility of the PBGC. Since when are the Republicans the party of big government? Why on Earth do we want to make the PBGC more relevant, as opposed to permitting these plans to stand on their own?

Instead of a simple loan program, Grassley and Alexander are now proposing to partition orphan participants from active lives, significantly reduce discount rates for the calculation of plan liabilities, change the formula for withdrawal liability, dramatically raise costs by ramping up PBGC premiums, provide tax incentives for the adoption of Composite plans, and on and on and on… It certainly makes it seem as if they want to drive multiemployer plans out of business, whether it is healthy or not. This is not a solution. I would hope that members from both parties can see through this charade before the entire multiemployer pension universe is crippled. Enough for now.

 

4 thoughts on “K.I.S.S.

  1. Russ, you have been wrong and not disclosing the cuts of 5% in lieu of tax cuts tells me you are not as interested in these people as you are in just pushing money to put a bandaid on a gaping wound.
    The loans would be paid back. Then they wouldn’t. Seriously, your thinking here was just give them enough money and hopefully they invest wisely enough to make enough money on the borrowed money to eventually pay it back with a little interest?
    This fund lost 15 billion of the participants money over nine years Russ. How many billions have they received over the years only to eventually be lost.
    Shall we talk about some of those investments? The Government of Turkey? The Government of Argentina (defaulted). The Government of Venezuela, (defaulted) These investments in a fund that has an expiration date of 5 years, and you know when this started? In 2012 Russ. A one dollar investment in a multi-billion dollar fund. One dollar was invested. Now, what did it cost to invest that dollar and why would it be there at all.
    The consent decree has addenda, you have not seen. Very few people have. The trustees now do indeed invest outside of the main fiduciaries and have for a while in certain investments. So their education in investing is what?
    And now you say this is a simple solution? This has never been as simple solution. Ever.
    Giving money back to the same people who lost it, is not protecting people.
    Where is the strategy here to grow the number of participants in these pensions? CS just needs to fold up and close, because of it’s toxic reputation, no one would want to go there
    Where is the real solution, that protects these people. It’s people like you who I wonder how you just think throwing money at the problem is always the solution.
    These people know their own fund manager wanted them cut. But it’s okay for him to keep making almost $700,000 thousand a year now. Maybe if BLA passes, he can just give himself the cool million he is hoping for per year.
    He really deserves it.
    Now, tell me more about how this is a solution?
    I have done the research and I look forward to your response.

    • Good morning, Mary, and thank you for your note. First, CS is one of three plans analyzed by Cheiron that would still need assistance from the PBGC. That has always been the case. However, 111 of the 114 plans that were analyzed by Cheiron had them meeting all of their obligations at a 6.5% annual return. Being able to save 111 of 114 without additional PBGC assistance is pretty darn good. Second, the money received through the loan program must be used to defease the retired lives liability. That is a critical component of the BLA, as it removes the possibility that plan sponsors will try to play the arbitrage game between the cost of the loan and the ROA. I have not been involved in the management of any of these funds, so I am not knowledgeable of past investment issues. I do know that pension plans should have been managing to their liabilities, as they were originally run. I am happy to discuss your issues with the BLA or any other pension issue. Have a great day.
      Russ

    • Your asking for your pension back the right way and there might not be one the same as there was no good reason to take it. There has been a simple solution at least for NYS. Their funding ratio continues to rise and assets are increasing over liabilities.This is from our money so why would you think that a loan would not work but severe pension cuts are. a dollar is a dollar and a dime is a dime

  2. Hi Joe – Thanks for your note. I agree with you that the loan program is essential in protecting these plans. They are in such negative cash flow that it is impossible to invest them to solvency. Without a loan, these C&D plans will collapse and become the responsibility of the PBGC. I don’t think that is the correct solution.

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