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!

As we’ve consistently said, the American Rescue Plan Act (ARP) is wonderful for the plan participants, but it does little to address some longer-term issues in multiemployer pension plans that could secure them further into the future. One such issue is withdrawal liability. The House bill specifically stated that employer withdrawal liability would not take into account any special financial assistance for 15-years after a plan received assistance, but this provision was removed from the Senate’s bill. As a result, there is uncertainty how withdrawal liability will be calculated once significant sums of money are received by these struggling plans.

The securing of pension benefits for the next 30-years (for current and future retirees) through the Act’s grant program may, in fact, reduce Withdrawal Liability for current employers given the dramatic improvement in funding. What I fear is that these employers will take advantage of the improved funding, should the PBGC not maintain the current rules, to exit these important pension systems rendering them fragile once again and likely forcing current and future workers into alternative pension structures.

We certainly don’t want this significant victory for union participants to be overshadowed by a potential unintended consequence as a result of changes to the calculation of withdrawal liability. We know that the PBGC has broad authority to impose restrictions on plans receiving financial assistance, including the authority to impose special rules pertaining to withdrawal liability. Let’s hope that any reduction in withdrawal liability penalties is scaled in over a long period of time (at least the 15-years originally considered in the House bill) and that the PBGC understands that DB pension plans must be protected and preserved for the masses.

We, at Ryan ALM, don’t just focus on DB pension systems, as any entity with a liability is fair game, such as OPEB, E&Fs, Nuclear Decommissioning Trusts, etc. What is important to note, is that we focus all of our energy on modeling that liability and managing to it so as to reduce the cost to the greatest extent possible. Because we believe securing theses benefits in a cost efficient manner and not generating the highest return is the primary goal in managing these programs.

We’ve reported often on the solvency of DB plans, whether they be public, private, or multiemployer. We’ve even reported on OPEBs occasionally, but not nearly to the extent that we should have, as many states are facing growing OPEB liabilities that may just dwarf the pension obligation.

For instance, New York is reported to have a $313.9 billion OPEB liability that equates to more than $16,000 for every man, woman, and child living within its borders. Those of us living in NJ shouldn’t snicker too much, as our OPEB obligation on a per capita basis is the second worst at $11,425 / individual. Delaware, Hawaii, Connecticut, Massachusetts, Maryland, Illinois, and Louisiana all have per capita exposure greater than $5,000 per resident. Kudos to North and South Dakota that have OPEB obligations that are <$100/resident.

What is frightening about OPEB obligations is the fact that they are mostly related to healthcare programs, which carry greater inflationary concerns than pension plans. Many of these states are meeting this obligation on a pay-as-you-go-basis, which is truly disconcerting. Prefunding this obligation could save these entities >30% depending on how far out in maturity a cash flow matching program can be funded.

Although many of these OPEB programs aren’t guaranteed, there is an expectation on the part of public fund workers that the promise made many years ago will be met. Failure to do so could lead to many issues, including retention and recruiting issues. Give us a chance to explain to you how our approach could secure those “other” benefits before it is too late.

According to a chart shared on LinkedIn.com by Lori Lucas, President and CEO, Employee Benefit Research Institute, 1989 was the year when Pension America truly began to be impacted by the looming pension crisis. Why 1989? This was considered the cross-over year in which more private sector U.S. workers were only in defined contribution (DC) plans versus those workers in only defined benefit (DB) plans. Unfortunately, 1% of private sector workers are in employment situations where they only have access to a DB plan, while a full 41% only have access to a DC plan. More than 40% of American private sector workers don’t have access to any retirement vehicle – that is the true crisis!

Given this situation, it shouldn’t be surprising that the National Institute for Retirement Security’s Retirement Insecurity 2021 survey found Americans more anxious about their retirement prospects. More than half of those polled doubt their ability to have an adequate retirement when they stop working. Given the uncertainty that has been exacerbated by the impact of Covis-19 on the average American, it shouldn’t be surprising that roughly 1/3 of American workers have adjusted their retirement date, with more than 2/3rds of those extending it. In addition to personal fears related to one’s retirement, 68% of Americans believe that the U.S. is facing a retirement crisis. They cite the lack of pensions (51%) as the primary reason.

DB pensions enjoy quite favorable views across political parties (a rare feat today) with 77% of Republicans and 81% of Democrats believing that DB plans are superior to DC plans. I believe that they are right! Not surprising, the guaranteed monthly payment is the most attractive feature of the DB plan. As I’ve often stated, asking an untrained worker to fund (in many cases with little disposable income), manage, and then disburse a retirement benefit is a cruel exercise! Why do we think that 99% of those individuals will be up to the task? In addition to a lack of a monthly benefit, survey respondents also cited several other reasons for why they believe that a retirement crisis is looming, including, higher healthcare costs, long-term care costs, decades of low-wage growth, and higher debt levels (thanks student loans) for those approaching “retirement”.

According to NIRS, “The U.S. is facing a retirement savings crisis that likely is worsening thanks to yet another economic crisis. Except for the wealthier Americans, the typical working American is not on track to maintain their standard of living in retirement”. A very sobering thought, indeed. Lastly, please don’t confuse average account balances as a measure of success for DC plans, as the lack of participation for a big swath of the American work force and MEDIAN account balances suggest a very different situation/outcome.

One more vote! That is all that remains before multiemployer plans (and their participants) finally get the pension relief that they’ve sought and needed for years. Some of you may have missed the fact that the $1.9 trillion stimulus package passed by both the House (February 27th) and the Senate (March 6th) contains multiemployer pension support in the form of H.R.423 – Emergency Pension Plan Relief Act of 2021. The Bill has been sent back to the House for a final vote, perhaps as early as this week.

This Bill is also known as the Butch Lewis Act (BLA), but it isn’t the original BLA, which provided for low-interest loans to Critical and Declining plans provided by a new department within the Treasury (Pension Rehabilitation Administration). This version will provide direct payments to plans to provide the promised benefits for the next 30-years, with no obligation to repay. There are some who say that the legislation doesn’t go far enough to ensure that history won’t repeat itself, but for many American workers who lost a portion (significant, in some cases) of their benefits through MPRA, those benefits will be restored, and forfeitures made whole, and rightly so.

This legislation comes at a time when many American workers and retirees have been crushed by the impact of Covid-19. The fact that benefit payments will be protected means that the communities in which they live will also see the benefits from the economic activity that these payments will create, and those same municipalities will see further support through income and sales tax revenue growth. There are estimated to be more than 180 multiemployer pension systems covering nearly 1.4 million American workers that would be eligible to receive these grants, but those numbers could become significantly greater in the near-future depending on how markets and our economy performs.

Although critics are claiming that little pension reform is included in this Bill, there are a few interesting wrinkles related to discount rates and implementation of the grant proceeds that we will explore in future blog posts. In the meantime, I am thrilled that we are finally going to see support for these struggling plans and their participants. I can’t imagine being promised a benefit only to have the rug pulled out from under me when it was finally time to collect. Too many Americans have struggled with the stress of such action. It just wasn’t right!

I was really pleased to participate in a CAIA panel discussion on February 23rd. The panel was asked to address “Solutions for Optimizing US Pension Structures with CAIA SoCal, Session 1 of a Series”. You can find the video here. The primary focus was on public pension systems that are under considerable pressure due to Covid-19 issues related to both lost revenue and greater expenses. In some cases, public pension systems were already struggling for myriad reasons. I hope that you find my thoughts beneficial and I certainly welcome any questions/comments that you might have to share with me. I know that you’ll find the comments by my co-panelists, Ray Joseph and Von Hughes, and the Moderator, Guy Pinkman to be spot on. Enjoy!

I am pleased to be participating in this important IFEBP sponsored event. I will be presenting on the history of Pension Obligation Bonds (POBs), the strategies used to date, the risks, and most importantly a unique approach that might just up end the “common wisdom”.

From IFEBP: Pension Obligation Bonds (POBs) are generating renewed interest; register now for this upcoming webcast on February 10 to learn more about what public sector pension plans may gain by issuing a POB.http://bit.ly/3cG1NHr

Hopefully, I’ll have the opportunity to share ideas with you.

Question: What is the purpose of a Pension Obligation Bond?

Possible answers:

1. A POB is intended to take advantage of potential arbitrage opportunities by investing in higher return asset classes that should outperform the cost of the bond? or
2. A POB is intended to secure the promised benefits and improve the plan’s funded status by investing the POB bonds proceeds in a cash flow matching strategy (bonds) that match and fund the pension plan’s liabilities from next month’s payment out as far as the POB proceeds permits?

For decades, most plans have said that 1 was the correct answer. It’s all about the arbitrage, especially with interest rates being at “historic lows”. But as multiple studies have shown, issuing a POB and hoping that the proceeds are invested in instruments that outperform the plan’s ROA over time is little better than screaming red when the roulette wheel spins. Given the low interest rates and stretched valuations for equities, is there a great probability that the plan will produce a total fund return that exceeds the cost of the POB during the next 10 years?

At Ryan ALM, we would unequivocally state that the true objective of a POB is to SECURE the promised benefits by cash flow matching the POB proceeds against the plan’s projected benefit payments and expenses. By doing so, the plan has bought time for the current alpha assets to grow unencumbered, improved liquidity, removed interest rate risk, and stabilized both the funded status and contribution expenses.

Remember, we have gone through several major corrections during the last two decades that would sabotage a POB strategy reliant on generating 6+% returns and capturing the arbitrage. Why take the risk? POBs are a great tool provided that they are implemented appropriately. Reach out to us at Ryan ALM to discuss our game changing strategy.

Yesterday, we reported that Congressman Neal (D, MA) had introduced pension reform legislation titled Emergency Pension Plan Relief Act of 2021 (EPPRA) on January 21st. We were also led to believe that the legislation bore similarities to the Butch Lewis Act (BLA). Having gone through the 37 pages of legislation several times, I’m sorry to inform you that it doesn’t. Not even close. In fact, apples and oranges have more in common.

Believe me, I am pleased that Congress is once again taking up pension reform, as millions of Americans are at risk of losing their promised benefits, but I would have hoped that a long-term fix was going to be part of any plan, especially since we already had terrific legislation passed by the House in July 2019 (BLA). I’m afraid that isn’t the case with this legislation. Don’t get me wrong, there are elements worth fighting for as participants that had benefits previously cut will be made whole, which is wonderful news. DB plans struggling to fund orphan participants will be able to partition (offload) those obligations to the PBGC and the maximum multiemployer benefit covered by the PBGC, which is now $12,870, will be enhanced. All good! But many of the current Critical and Declining plans are not going to return to health just through partitioning.

Why is it that the BLA isn’t the legislation of choice? The BLA would secure benefits for All Retired Lives. Instead of starting over by filing new proposed legislation in the House, why not push for the BLA to be taken up in the Senate? Both chambers of Congress are controlled by the Democrats, who passed the BLA in the first place. You would think that they would exert a little muscle and try to get their preferred legislation enacted.

We will continue to provide updates on this developing story. Stay tuned.

House Ways and Means Committee Chairman Richard Neal (D-MA) introduced the Emergency Pension Plan Relief Act of 2021(EPPRA) on January 21, 2021. EPPRA represents the latest legislative attempt to address the well-documented multiemployer pension crisis. We are told that there are similar elements in this legislation to those which were included in the Butch Lewis Act (BLA), but it is not a clone. For example, we do not see the Federal loan that was the central point of the BLA that defeased and secured Retired Lives. We, at Ryan ALM, thought that the BLA was an excellent piece of legislation. Let’s hope that a proposed bill (BLA or EPPRA) actually sees the light of day in the Senate, as time is getting short for both troubled plans and the participants who continue to count on their promised benefits. We will get back to our blog followers with more details as they become known to us.