According to critics, the federal government’s rescue plan for the joint pension scheme is unsuccessful
Earlier this year, Congress threw a lifeline on troubled pension plans of several employers. But the rescue efforts are tangled up in regulations that could ultimately crash many retirement plans, pension experts say.
Pension Benefit Guaranty Corp., which insures defined benefit plans, released rules earlier this month outlining a new multi-employer financial assistance program on behalf of the American Rescue Plan, which was passed in March. The law allows certain underfunded multi-employer plans to apply for taxpayer-funded grants that have no repayment obligations and can help stabilize shaky funding and restore previously cut benefits. However, the new PBGC rules make it very likely that plans that accept the assistance will default within 30 years, say pensioners, lawyers, and other experts, leaving younger workers with little incentive to join those plans.
The PBGC was “too draconian” in calculating the amount of the grant, says Russell Kamp, managing director of investment management firm Ryan ALM. In general, “if they get there at all, these plans don’t allow these plans to survive beyond 2051”.
“The American Rescue Plan provides funding for severely underfunded retirement plans that ensure that over 3 million American workers, retirees and their families receive the retirement benefits they have earned through years of hard work,” said PBGC Director Gordon Hartogensis announcing the new rules. The new financial assistance program is expected to raise approximately $ 94 billion to more than 200 eligible multi-employer plans, according to the PBGC. The agency is open to public comments on the provisional final settlement until August 11th.
About 1,400 cross-employer pension plans, created through agreements between unions and two or more employers, cover more than 10 million participants, typically in industries such as construction, trucking, manufacturing and retail.
Do not miss: Is your retirement plan on track? These benchmarks can help determine where you are.
Dwindling union formation in some industries and employers withdrawing from the pension plans of several employers have for years contributed to the financial problems of these plans. And if one employer goes bankrupt on a plan, the remaining employers can get stuck with uncovered benefit obligations. A 2014 law gave certain underfunded pension plans the ability to reduce retirement benefits. Since then, 18 such plans have received Treasury Department approval to cut benefits under this law, the Multi-Employer Pension Reform Act, resulting in drastic income cuts for some retirees.
In plans that receive the new financial assistance, these previous benefits are restored. But many plans might think twice before seeking help, pension experts say.
One problem: The interpretation of the PBGC requirements of the American Rescue Plan that the amount of financial support should be sufficient to pay all benefits due by 2051. According to the rule of the PBGC, the amount of support is equal to the difference between the plan’s obligations in the next 30 next (including benefits and administrative expenses) and its resources, including current assets, contributions over the next 30 years, the income from these amounts and expected payments of “withdrawal obligations” of employers who leave the plan. According to this interpretation, after 30 years “every single fortune that one has by 2051 has been used up”, says Kamp, including the contributions that should provide services beyond the year 2051, the very least that you can think of “after the law.
PBGC believes the “simple meaning” of the law is that all plan resources and obligations should be taken into account, the agency said when it rolled out the new rules.
The PBGC’s approach may reflect a desire to restrict taxpayers to the program, pension experts say. The federally funded financial aid program also helps improve the shaky financial condition of PBGC’s multi-employer insurance program, which is funded through premiums paid by plans. At the end of last year, the insurance program was facing bankruptcy in the 2026 financial year.
Another concern about the new financial aid program is anchored in the language of the law, say pension experts. The interest rate used in calculating the amount of the grant is, according to experts, significantly higher than the expected return on the available investment opportunities for this cash pot, creating a funding gap. “That drives you into bankruptcy sooner,” said Gene Kalwarski, CEO of actuarial consultancy Cheiron.
To make up for the shortfall, the plans may be tempted to invest their other assets more aggressively, pension experts say. “This is an invitation to be careless with the plan resources,” says an expert who asked not to be mentioned during the regulatory review. “If you want your plan to last, you have to take many risks.”
The PBGC rules put younger multi-employer plan participants – and the unions they represent – in a difficult position, experts say. “If you’re a younger member of one of these plans right now, ask yourself if you’d like to continue participating,” says Kamp, as the plan could go broke by the time you retire. When a multiple employer plan fails, the PBGC guarantees benefits up to certain limits, but those limits are often much lower than the benefits retirees would have received had the plan remained healthy.
While PBGC may still revise the rules based on public comments, some observers doubt that the end result will live up to the intent of the legislature in adopting the grant program. Senate Majority Leader Chuck Schumer said in early March that he would be closely monitoring the implementation of the new program to ensure that plans that receive support “are not placed in a worse long-term funding position than now or likely in the future. “The program, the New York Democrat said,” is intended to be a long-term solution to these ailing plans, a solution that will protect retirement benefits as well as the health of the plans themselves. Schumer’s office did not respond to a request for comment.
Opinion: Your 401 (k) is no place for private equity