Recommendations of the
Retirement Security Review
Commission
IBEW / NECA National
Benefits Conference
January 31, 2013
Presented By:
Randy G. DeFrehn
Executive Director
National Coordinating Committee for
Multiemployer Plans
1
January 30, 2013, 10:32 p.m. ET
Some Unions Grow Wary of Health Law They Backed
By JANET ADAMY and MELANIE TROTTMAN
Overview
• Trends in Retirement Income
Provision
• Current Challenges Facing
Multiemployer Plans
• Retirement Security Review
Commission
• Recommendations for
Comprehensive Reform
Shift from DB to DC
• Trend over past 30 years
• Dominant among Corporate plans as
the Primary Retirement vehicle
– Driven by:
• Employers’ Desire to Shift Investment Risk
• Vastly reduce administrative cost & complexity
• Objective usually based on capital
accumulation, not replacement
income target
– Complicates Retirement Planning
– Eliminates Retirement for most low to
Moderte Wage Workers
• DC Typically supplemental for most
multiemployer plans
Positive Correlation
Between Union
Representation and
Pension Coverage
“Overall, union
workers’
rate of participation
in retirement
plans—at 80
percent—was greater
than that of nonunion
workers, which
was 48 percent.”
U.S. Department of
Labor, Bureau of Labor
Statistics…March 2009
“The only surveyed
group that had greater
participation in
defined-benefit plans
than defined
contribution plans was
union workers. The
defined-benefit
participation rate was
67 percent for union
workers, more than
triple the average rate
of all private industry
workers.”
Why DB?
The More Efficient Approach
“… we find that a DB pension plan can offer
the same retirement benefit at close to half
the cost of a DC retirement savings plan.
Specifically, our analysis
indicates that the cost to deliver
the same level of retirement
income to a group of employees is
46% lower in a DB plan
than it is in a DC plan.
•Longevity risk pooling in a DB plan saves
15%,
•Maintenance of a balanced portfolio
diversification in a DB plan saves 5%, and
•A DB plan’s superior investment returns
save 26%
…… as compared with a typical DC plan.”
Current Challenges
PPA Zones
“Endangered”
Status =
Yellow Zone
“Critical” Statu
Red Zone
Renewed Focus on
Unfunded Vested
Liabilities
Not Your Grandfathers’
Withdrawal Liability
• Changing Environment in the
Financial Services Industry
– Tighter Funding Rules from PPA
• Higher Contributions to meet
Rehabilitation and Funding Improvement
Plans
– Dodd – Frank Tighter Controls on
Lending
– FASB’ s New Disclosure Requirements
– Credit Suisse, Rating Agency Critiques
What Can Be Done?
NCCMP
“Retirement Security
Review Commission”
Background
• Why Examine the Multiemployer
System Now?
– Funding rules sunset in 2014
– Unprecedented challenges
• Asset volatility
• Recession
• Accounting / Ratings agency pressure
– Last fundamental change to system
was in 1980
Background
• Commission Overview
– Met for over a year
– Included Over 40 Organizations
•
•
•
•
International unions
Employer trade groups
Individual large companies
Multiemployer plans
– Participating Industries
• Construction, trucking, retail food,
entertainment, machinists, mining,
bakery & confectionary, service
Background
• Process –
– First Monthly Meetings, Evolved to
2 days per month Plus Conference
calls among work groups
– Sought Expert Advice:
•
•
•
•
•
Economists
policy researchers
investment professionals
Actuaries
representatives of non-US plans
Background
• Core Principles
–Proposals must protect
retirement income security
for participants
–Proposals must reduce or
eliminate the financial risk
to the sponsoring
employers
Background
• Commission Focus Fell into Three
Categories
– Preservation:
• Provisions to strengthen the
current system
– Remediation:
• Measures that target deeply
troubled plans
– Innovation:
• Proposal for alternative plan
design structure
Background
• Commission Recommendations
Are Additional Tools for Plans
– Strictly Voluntary: Plans are not
required to adopt any new
provisions
– Trustees of many plans need more
flexibility to address challenges
Preservation
Provisions to Strengthen the
Current System
• Allow Certain Yellow Zone Plans
to Elect to Be in Red Zone
• Extend certain red zone features
to All Yellow Zone Plans
• Ability to adjust benefits would
remain limited to red zone plans
• Establish Permanent Funding
Relief Provisions Fashioned After
Provisions Enacted Post-PPA
Provisions to Strengthen the
Current System
• Exclude additional contributions
required by Funding Improvement
or Rehab plans from being subject
to withdrawal liability
• Encourage Mergers and
“Alliances”
• Allow plans to harmonize normal
retirement age with Social
Security
Remediation
Provisions For Deeply
Troubled Plans
Current Rules
• For the minority of plans (6 - 10%
or approximately 90 – 150 plans)
facing inevitable insolvency there
is no early intervention option
– Assets must be depleted and Benefits
will be cut to PBGC maximum
guarantee level
• Approximately $13,000 per year for full
career (30 Year) employee who retires at
age 65
– Ability of PBGC to support even this
benefit level is in doubt
Key Statistics:
PBGC Multiemployer Guaranty Fund Net
Program Financials
Net Position September 30, 2011
($2.770 billion)
2011 Snapshot:
Premium Income
Investment Income
$92 million
$91 million
Total Assets
New Liabilities
$1.807 billion
($2.467 billion)
Net Position September 30, 2012
($5.237 billion)
PBGC Annual Report 2012
• “The Corporation estimates that, as
of September 30, 2012, it is
reasonably possible that
multiemployer plans may require
future financial assistance of
approximately $27 billion.”
Provisions For Deeply
Troubled Plans
• Commission Recommends that if :
a) A plan has taken all reasonable
measures to improve funding
b) Insolvency is still inevitable
c) It is possible to avoid insolvency and
preserve benefits above the PBGC
maximum guarantee level
• Then the Adjustable Benefit
authority granted to trustees
under PPA should be extended to
permit suspension of a portion of
the accrued benefits
Provisions For Deeply
Troubled Plans
• Key Considerations
– Preserving benefits above PBGC
guarantee is preferable to
insolvency
– Early Intervention will allow some
plans to survive for future
generations
– Troubled plans may choose to use
this tool based on their individual
circumstances and philosophy
Provisions For Deeply
Troubled Plans
• Criteria for accessing
Benefit Suspension Tool:
– Insolvency projected within:
• 15 years
• 20 years if active to inactive
ratio exceeds 2:1
– Plan has taken all reasonable
measures to avoid insolvency
– After application of
suspensions, plan is projected
to be solvent
Provisions For Deeply
Troubled Plans
• Suspension Limitations
– Benefits must be preserved at no
less than 110% of PBGC guarantee
– Suspensions must be no greater
than is necessary to avoid
insolvency
– Any future benefit increases must be
accompanied by a comparable
restoration of suspended benefits
Provisions For Deeply
Troubled Plans
• Participant Protections
– PBGC approval is required
– Application must describe:
• Measures taken to improve funding
• Summary of proposed suspensions
– PBGC has 180 days to consider
application
• Trustee due diligence will be granted
great deference
• PBGC inaction will be a deemed
approval
Innovation
Alternative Plan
Design Structure
• Current Available Options Do
Not Meet Needs of All Groups
– Defined Benefit Plan – Employers
find market risk unacceptable
– Defined Contribution Plan
• all risk rests with participant
• highly inefficient vehicle for
retirement security
• Parties should have ability and
be encouraged to develop new
flexible models
Alternative Plan
Design Structure
• Commission Approach
– Avoid DB vs. DC Jargon
– Overall Commission Principles
• Secure retirement income
• Reduce risk to employers
Alternative Plan
Design Structure
• Commission Approach
– Attract and retain employers
– Promote creative plan designs
• Innovation is encouraged –
Flexible alternatives include,
but are not limited to:
– Variable DB plans (Cheiron/UFCW
Design)
– Target Benefit Plans (similar to
Canadian Plans)
Alternative Plan
Design Structure
• Variable Defined Benefit Plan
– Generally fits current DB
definition
– Comprised of two component
parts
• Core Benefit
• Variable Benefit
– Operates under Current Law
Alternative Plan
Design Structure
• Variable Defined Benefit Plan
– Core Benefit is determined using a
low assumed rate of return (e.g. 5%)
– Variable Benefit is derived from
earnings in excess of Core
• Can be increased in good years or reduced
in years of poor investment performance
but benefit cannot go below Core Benefit
Value
• Participants are assigned “Shares”
– Number of Shares are definitely determinable
– Value of Shares is variable
Alternative Plan
Design Structure
• Variable Defined Benefit Plan
– Employers remain subject to
withdrawal liability as under current
rules
– Likelihood of incurring liability
greatly reduced through conservative
management of investments
– Can be further reduced by purchase of
annuities on retirement
– Covered by PBGC Multiemployer
Guaranty Fund
Alternative Plan
Design Structure
• Target Benefit Plan
– Operates like but is technically
not a defined benefit plan
– Neither DB nor DC plans under
current code definitions
– Designed as a better alternative
to moving to current DC design
Alternative Plan
Design Structure
• Target Benefit Plan
– addresses Shortcomings of
defined Contribution plans
• Benefits are paid as lifetime
annuities
• Pooling of longevity risks
• Ability to Negotiate Fees
comparable to current DB fees
• Asset diversification to enhance
returns
Alternative Plan
Design Structure
• Target Benefit Plan
– Eliminates withdrawal liability
– Funding standards more conservative
than current system
– Trustees have increased ability to adjust
benefits in event of funding distress
– Options depend upon plans’ current
Funding level
– appropriate protections for vulnerable
populations
Alternative Plan
Design Structure
• Target Benefit Plan
– Plan minimum contributions
determined by plan actuary
– Would permit diverse investments to
allow participation in market gains
– Builds in participant protections by
requiring funding at 120% of expected
costs
Alternative Plan
Design Structure
• Target Benefit Plan
– Funding adequacy determined by 15
year projection
– Benefit adjustments are required at
various points based on current
funding and 15 year projection
– Additional protections are possible
through portfolio immunization and
purchase of annuities
Alternative Plan
Design Structure
• Target Benefit Plan
– If a plan fails to meet the long term
funding requirements, Trustees are
to take corrective actions based on
hierarchy of adjustment options
– Self Correcting feature
distinguishes this design from DB
plan
– Since PBGC Guaranty Fund only
insures DB plans, the Target Plan
would not be covered
Alternative Plan
Design Structure
• Target Benefit Plan
– As a last measure, in the event of
a catastrophic event the core
(non-ancillary) benefits of
pensioners can be reduced
– Reductions subject to
protections for vulnerable
populations in deeply troubled
plans including PBGC oversight
Alternative Plan
Design Structure
• Key Concepts
– Eliminating Withdrawal Liability can
remove current employer incentives to
leave
– For most plans, withdrawal liability is
not a significant source of
contribution income
Alternative Plan
Design Structure
• Key Concepts
– Goal of flexible plans is to focus
on benefit security
• Will both preserve and strengthen
worker retirement security by:
– willingness of current employers to
remain in the system and for new
ones to enter
– Prudent and conservative
management by the trustees
Alternative Plan
Design Structure
• Transition
– Adjustable benefit provisions
apply prospectively only to
credit earned after adoption
– Parties migrating to a flexible
benefit design would have
access to extended
amortization of legacy
liabilities
Alternative Plan
Design Structure
• Transition
– Current rules remain in effect
for legacy costs
• PPA zone statuses
• Minimum funding standards
• Withdrawal liability
• Benefit protections
• PBGC Guarantees Apply (to the
extent they remain available)
Alternative Plan
Design Structure
• Transition
– Accruals in current plan would
ceases, and accruals in new plan
would begin
– New and old plan can have same
provisions
– Contributions are allocated
between legacy benefits and
future benefits
– Longer amortization allowed in
legacy plan to ease transition
Next Steps
• Determine Legislative vs. Regulatory
Paths
• Draft proposed language
• Develop sophisticated Messaging
Program
• Educate Congressional Committee
Members and Staff and Regulators
• PPA rules sunset at the end of 2014 –
another election year
Target for Congressional Action -
2013
Questions???
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