The Case for Pension Relief
Presented by:
Joseph A. LoCicero
Harold S. Cooper
July 16, 2014
Copyright © 2014 by The Segal Group, Inc. All rights reserved.
Background
Main Multiemployer PPA Provisions of
Pension Protection Act of 2006
 Provided for zone status
 More rapid funding (15 years)
 Scheduled sunset – end of 2014 plan year
Effect of Sunset
 Plans in Yellow and Red Zones continue
with funding improvement and rehabilitation plans
 Plans in Green Zone – lose options if funding deteriorates
 Funding rules continue
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Background
Solutions not Bailouts
 Assumed no government bailout
 Considered financial challenges of PBGC multiemployer fund
 Designed to preserve the multiemployer system with regular and reliable lifetime
retirement income
 Reduce the financial risks to employers in order to keep them in the plans and in
order to attract new employers
Employer Concerns
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Ability to borrow
FASB exposure
Withdrawal liability
Last man standing
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NCCMP Benefit Suspension Proposal
Plan has taken all reasonable measures to improve funding
Plan is expected to become insolvent within:
 20 years if ratio of inactive participants to active participants exceeds 2 to 1
 15 years otherwise
 Insolvency can be avoided if benefits are reduced but not below 110% of PBGC
guarantee
Central States example — Can pay out $72 billion in benefits over
next 50 years with suspension, compared to $28 billion before
insolvency without
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PBGC Guaranteed Benefits
Based on participant’s benefit and years of service
 Determine participant’s average benefit per year of service
 Guarantee per year of service is:
– 100% of first $11 of benefit
– 75% of next $33 of benefit
– Benefits in excess of $44 are not covered
– Maximum benefit is $35.75 per year of service
 Sample maximum guaranteed benefits:
– 20 years: $715/month
– 30 years: $1,072/month
– 40 years: $1,430/month
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Case Study
Midwest area construction plan
Expected to become insolvent in 2028
 Insolvency date has been delayed due to favorable
investment performance
Contribution level of $10 per hour
 Limited increases in contribution rate
(was $9 in 2006)
Benefit accrual rate of $50 per year of
service, reduced from $100 several
years ago
 Many other cutbacks made as part
of Rehabilitation Plan
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Retiree and Cash Flow Statistics
Average benefit (not including beneficiaries) of $1,700 per month
 For service pensions, average benefit is $2,900
 25% of pensioners have benefits in excess of $2,500
 PBGC guaranteed benefit maximum is $1,430 or less
Total benefits paid are $40 million
Total contributions are $20 million
 Net outflows of $20 million per year
Market value of assets is $164 million
 Expected asset decline of $8 million per year
and accelerating
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Projected Plan Assets with no Changes
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Potential Benefit Suspension
Trustees asked: What is minimum reduction required across the
board (actives, inactive vesteds and retirees) that would keep the
plan from insolvency?
 Approximately 10%
 A few beneficiaries were affected by the 100% of PBGC guarantee requirement,
so the average reduction was 9.8%
 Other issues not considered, such as limited reductions to older or low benefit
participants
PBGC Guarantee would result in
average benefit cut of nearly
50%, once the plan is insolvent
After suspension, benefits much
better than PBGC guarantee
 Example: Service pension about
$2,600 vs $1,100 guarantee
 Average benefit with suspension is
80% higher than Guarantee
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Projected Plan Assets After Suspension
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Green Zone Plans
65% of plans are in Green Zone1
There are “Shades of Green”
 Almost 10% of Green Zone plans are expected to migrate
into the Yellow and Red Zone in the absence of actuarial
gains or corrective actions by the Trustees, assuming
continuation of PPA rules
 Although favorable experience would decrease the
percentage, unfavorable investment results and/or
employment declines could increase the percentage
significantly
Face significant increase in PBGC premiums.
These plans need the current tools, along with
the other tools proposed in Solutions not Bailouts
1Segal
Consulting’s Survey of Calendar Year Plans’ 2014 Zone Status, Spring 2014
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