Corporate America has been exiting from defined benefit plans for decades. There are many reasons why this trend exists, but one of the primary reasons cited often focuses on the excessive cost to insure these plans/participants with the PBGC. As a reminder, there are two annual PBGC costs associated with single-employer plans, including both fixed and variable costs. In 2019, the PBGC charged $80 per participant as a fixed cost, and an additional variable premium charge of $43/$1,000 of UVB (unfunded vested benefit) with a maximum cost of $541/participant. As you can imagine, those costs add up quickly.
Multiemployer plans are also insured by the PBGC, but they participate in a separate pool from single-employer plans. As of 2019, Multiemployer plans were charged $29/participant with no additional variable payment. As a result, the level of participant protection is vastly different with the benefits of participants in single-employer plans protected to more than $72,000/year, while a 30-year veteran aged 65 under a multiemployer pension plan would receive a maximum benefit of only $12,870 or about 1/5 of an employee who worked the same length of time, but was fortunate to work for a private company.
With that information as a backdrop, how does it make sense that a proposal being floated in DC to “help” multiemployer plans calls for drastically raising the premium per participant to the same level currently charged single-employer plans? If high premiums are one reason cited for the demise of DB plans within corporate America, how are struggling multiemployer plans going to afford this ridiculous increase? Furthermore, this “rescue plan” contemplates a tax on both active participants as well as current retirees? Wasn’t this a benefit that was promised to, and in many cases, paid partially by the employee?
Levying these additional costs on top of struggling plans that in many cases have few years of solvency left is nothing more than an attempt to drive these plans into bankruptcy and ultimately the PBGC, as opposed to actually providing a lifeline to protecting and preserving theses critically important programs. The other proposal being considered is the Butch Lewis Act, which was passed by the House of Representatives in July 2019. This legislation calls for low-interest rate loans from the U.S. Treasury Department based on the 30-year Treasury rate to be offered to the plans that are designated as in critical and declining status. Given the historically low Treasury 30-year rates today, the timing could hardly be better. It is estimated that the net cost of this proposal is $31.8 billion. However, when Cheiron (pension actuaries) did the original work, 111 of the 114 plans reviewed at that time were able to pay back the loans at the end of 30-years. Given that fact, where is the cost to the taxpayer? It certainly isn’t $31.8 billion.
But, even if it were to be a cost of $31.8 billion, why shouldn’t the stimulus package include multiemployer pensions whose assets were hard hit by the Covid-19 pandemic? With the Federal government handing out trillions to support every conceivable program, why not pensions? The 1.4 million American workers in these failing plans need our support. Furthermore, the economic activity produced by these benefit payments far outpaces the estimated cost to support them. Let’s not be penny wise, but pound foolish. Let’s put forth legislation that actually protects and preserves these plans as opposed to driving them into the PBGC where participants are likely to receive only pennies on their promised dollar of benefits.