So Many Unknowns

We’ve been dedicating some time in our blog to the American Rescue Plan Act (ARPA), as it is an incredible piece of legislation designed to protect and preserve struggling multiemployer DB plans for the next 30-years through segregated financial assistance (SFA) from the U.S. Treasury and the Pension Benefit Guaranty Corporation (PBGC). But is that protection actually there? I raise this concern because of several gaping holes in the legislation that deserve our attention. They certainly will have the attention of the PBGC, the organization responsible for providing guidelines within 120 days of the Act’s signing (roughly July 9th).

Yesterday, I addressed my concerns regarding withdrawal liability. We, at Ryan ALM, are also very concerned about the discount rate used to determine the segregated financial assistance (PPA 3rd segment rate +200 bps), which we will highlight in another post. In addition, there are still many questions as to how the segregated assets can be invested. The Act states that the assets received through SFA should be invested in investment grade bonds or other assets as allowed by the corporation (read PBGC). But of greatest concern (to me) at this time is how the financial assistance is to be calculated, exclusive of the discount rate issue. Are existing assets and future contributions going to be included, as some suggest, in order to determine the funding shortfall or will a present value calculation of the actuaries forecast of future benefit payments for the next 30-years be the appropriate measure?

I had the pleasure to listen to an IFEBP sponsored webcast on the ARPA yesterday. The speakers did an excellent job going through the many points addressed in the Bill, but they also had questions about the appropriate methodology to be used to determine the level of financial assistance. They presented two methodologies, which create significant differences in the potential aid received by these plans. In one case, the plan is expected to include current assets and future contributions, minus expenses, before determining the potential support. In that example, they “needed” <$200 million in financial aid, but the plan was forecast to become insolvent in 2052. Not ideal!

In the other interpretation, the actuaries 30-year forecast of benefit payments (inclusive of current retirees and those actives that would retire during this time frame) was discounted at a 5.59% rate (PPA 3rd segment rate +200 bps) suggesting that the financial assistance needed to secure those promised benefits was just under $1 billion. Wow! Quite the difference. Wait, it gets more complicated. We reached out to the CEO of a leading multiemployer actuarial firm to get their take. They’ve determined that possibly as many as five different scenarios exist as it relates to determining the appropriate aid. Again, it will be critically important to get the PBGC’s input into which scenario was intended by the legislators. Did they want these plans to continue as viable entities or was their goal simply to get through the next 30-years?

More than 1 million American Union workers now believe that their benefits have been ensured by the passage of ARPA, but have they been? Anyone of the issues that I’ve raised could impact the amount of money available to meet those promises. If several of these issues are not resolved in a satisfactory way, the celebrations will have proven premature and the fate of the critical and declining (C&D) and critical plans will once again be uncertain. More to come!

2 thoughts on “So Many Unknowns

  1. It is definitely prudent to be skeptical to exactly how this estimated $86 billion is to be partitioned among the 61 C&D , 112 C and 18 MPRA multi-employer plans. It is imperative to know what methodology or “assumptions” with be incorporated to ensure this another “promise” will be executed correctly. The 5.59% rate seems inflated to me.

    • Hi Tom – I hope that you’ve been well. The 5.59% discount rate could create a funding shortfall of 20% to 40%. The negative arbitrage of discounting at 5.59% and investing in investment-grade bonds at 2.5% is the real culprit, but there are other issues, which I highlight in this post. Much still to be decided. Stay well.

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