The Pension Benefit Guaranty Corp. issued rules Wednesday outlining how it would help troubled multi-employer pension plans stay afloat.
It would do this by creating “partitions” — an agreement by the agency to back separate “successor plans” covering the liabilities that insolvent multi-employer plans cannot take on. To get the agreement, the multi-employer plans first must cut benefits to reduce their inability to meet future obligations.
“Before PBGC can provide help to a plan, the law requires that the plan must have taken all reasonable measures to remain solvent. Those measures include making certain benefit reductions to ward off larger benefit reductions in the future,” the announcement said.
The trade-off is intended to ward off potential plan bankruptcies. While the plans’ participants would get reduced benefits, they also would also get the guarantee of a higher benefit than they would otherwise get if their plan went bankrupt. A successor plan whose benefit under the PBGC would ordinarily be $1,000 per month, for example, would instead be at least $1,100 per month.
The corporation is the federal entity that protects the pension benefits of more than 41 million Americans in private-sector pension plans. It is funded primarily through insurance premiums. The corporation is under severe financial strain, with a net accumulated financial deficit of $61.8 billion in fiscal 2014, up from $26 billion from the previous year, according to a February report from the Government Accountability Office.
Multi-employer plans are defined benefit pension funds that multiple businesses pool their resources into. The plans are jointly managed by businesses and labor groups. Should a business fail, the remaining companies are obligated to pick up the slack and pay benefits to that company’s retirees.
In February, the Labor Department reported that 150 union multi-employer pension funds were in “critical status,” meaning that they lacked enough assets to meet at least 65 percent of their future obligations. Another 85 funds were listed as being “endangered,” meaning they lack the assets to meet at least 80 percent of their future obligations.
Concern that a potential wave of bankruptcies of multi-employer plans was looming and would take down the PBGC with them prompted a rare bipartisan legislative success last year, a bill co-authored by Reps. John Kline, R-Minn., and George Miller, D-Calif.
The law authorized troubled multi-employer plans to cut members’ benefits, which had been prohibited by law, even in cases where the plan was on the verge of bankruptcy. The legislation was backed by businesses and labor groups, though few were eager to tout the success.
Wednesday’s announcement lays out the mechanics. “[A] multiemployer plan that is in danger of becoming insolvent (the original plan) transfers the minimum amount of liabilities necessary for it to remain solvent to a newly created successor plan. No plan assets are transferred. While the same Board of Trustees will administer the original plan and the successor plan, PBGC will provide financial assistance to the successor plan to pay the transferred benefits.”
The corporation notes on its website that it may not be able to agree to partitions for all troubled plans. “PBGC’s ability to approve partitions will be limited by its financial resources. The agency must certify that providing help to a particular plan doesn’t hurt its ability to provide assistance to participants in other troubled plans.”
