I frequently get comments on the blogs that I produce. I love the feedback, even when I am being called a putz or worse! There is a gentleman who has engaged more often than most everyone else who yesterday commented that H.R. 397 (The Butch Lewis Act – BLA) would have had a painful start had this rescue program been implemented in January or February of 2020. This statement couldn’t be more wrong! My support for this legislation has never been stronger.
As a reminder, the BLA calls for low-interest loans to be provided to multiemployer pension systems designated in Critical and Declining status, which numbered roughly 125 at the start of the year (it is many more today). These systems would calculate what is needed to defease ALL of the Retired Lives Liability. The proceeds from the loan HAVE to be used for this purpose. Plan sponsors and their consultants cannot play games by trying to arbitrage between the loan interest rate and the return on asset assumption. It is that exact reason that pension obligation bonds have failed in most cases.
In this case, the bond portfolio cash flow matched to the plan’s Retired Lives Liability would have moved in lockstep with the plan’s liabilities negating the lower interest rates that are negatively impacting plan liabilities in today’s environment. It would have provided the cash flow necessary to meet benefit payments, removed interest rate risk for that portion of the portfolio, while importantly extending the investing horizon for the remainder of the assets that now have time to navigate through these difficult markets, as they try to beat future liability growth.
The fact that Congress has failed to provide this necessary support has only exacerbated a very challenging situation. Unfortunately, these Critical and Declining plans will have seen a tremendous asset loss combined with incredible growth in pension liabilities as long-rates have plummeted. Funded ratios have collapsed and as a result, the cost to protect and preserve the benefits for 1.4 million American workers and retirees has grown substantially. It is shameful!
However, it is not too late and this legislation should be passed immediately before these plans all fade away. Although the underfunding may have grown, the cost of the loan has gotten a lot cheaper for these challenged plans, as the loan interest rate is predicated on the U.S. Treasury 30-year bond plus 25 bps. Today, that would mean a loan rate of only a little over 1.5%!! Most multiemployer plans have some exposure to fixed income. For those that would qualify for a loan, the proceeds would be used to meet current benefits, while the current assets and contributions could be used to meet future liabilities. Any existing fixed income exposure could be used to rebalance to equities and alternatives at these depressed levels. Let’s get this done now before it becomes a moot point!