Washington Insights – Fall 2019

Aug. 23, 2019 | By Jon Vogler

Jon Vogler
Senior Analyst,
Retirement Research,
Invesco Consulting

Multiemployer pension plan legislation passed by House of Representatives

Fall 2019 edition examines the controversy surrounding the Rehabilitation for Multiemployer Pensions Act.

In our Winter 2019 edition of Washington Insights, we cited the dire situation faced by many US multiemployer pension plans. These plans are created under collective bargaining agreements and jointly funded by groups of employers within common industries. Currently, the benefits of 1.3 million workers and retirees are at risk due to severe underfunding. It is estimated that these underfunded plans could run out of money to pay benefits within the next 15 to 20 years.1 On July 24, 2019, the House of Representatives passed the Rehabilitation for Multiemployer Pensions Act — the latest attempt to deal with the multiemployer plan crisis. In a nutshell, the bill would provide funds for 30-year loans and new financial assistance (in the form of grants) to financially troubled multiemployer pension plans. While the bill is hailed by some as a potential solution for underfunded plans, others view it as just another government “bailout.” Today, we will explore these issues and previous legislative fixes while assessing the current controversy over this bill and its prospects in Congress.

Background on multiemployer pension plans

In these plans, workers generally accrue retirement benefits based on a rate negotiated by their employer with their respective union. The most common reason cited for the underfunding of multiemployer plans is the upheaval resulting from stock market crashes in 2001 and 2008 to 2009 and subsequent industrial decline that led to consolidation and job losses. While the majority of multiemployer plans have since returned to financial health, a substantial minority (covering about 1.3 million of the 10 million participants) face serious problems. According to estimates from Cheiron, an actuarial consulting firm,1 plans are underfunded by a total of $48.9 billion.

Meanwhile, the Pension Benefit Guaranty Corporation (PBGC), the federally sponsored insurance backstop for defunct defined benefit pension plans, expects its multiemployer insurance program to run out of money within 10 years, absent reforms.

Legislative efforts

Congress did approve an overhaul of these plans in 2014 (the Multiemployer Pension Reform Act – the Act), but as noted in the Winter 2019 Washington Insights, the legislation faced strong resistance from retiree organizations, consumer groups and some labor unions. The Act allowed plans facing impending insolvency to cut accrued benefits if approved by the Treasury, with the idea being it was better to reduce all benefits than leave some participants with none. For Treasury, one key criterion for approving any cuts in benefits was the plan must be sustainable once the cuts are made. Benefit cuts vary widely depending on what a plan proposes and the tenure of the worker, but in some cases, the cuts can be dramatic.

Last year, a special congressional committee appointed to create a replacement for the Act missed its end-of-November deadline. A draft proposal, however, would have raised the guaranteed minimum benefit paid by the PBGC if a plan fails. It also would have injected federal funds into the agency (perhaps $3 billion annually) to expand a program allowing it to take on benefit payments to so-called orphans – people with earned benefits from employers who have dropped out of plans, often because they have gone out of business. According to experts, sticking points in the discussion have included the assumptions used to measure plan liabilities and how much stakeholders (including the government) should contribute to maintain a viable multiemployer system.1

How the new bill would address the situation

The Rehabilitation for Multiemployer Pensions Act (RMPA) was introduced in the House by Rep. Richard Neal, D-MA, on Jan. 9, 2019 and then passed (along party lines) by the House Ways and Means Committee in early July before being approved by the full House on July 24. The bill is also known as the Butch Lewis Act. A former president of Teamsters Local 100, Lewis died in 2015 after years of advocacy for union pension funding. (A similar bill was introduced in the Senate on July 24.)

The bill would establish the Pension Rehabilitation Administration and a related trust fund within the Treasury Department to make loans (and in some cases grants) to multiemployer plans in critical and declining status. The loan program would be financed by the sale of Treasury bonds.

As detailed in the text of the legislation, the program is designed to “operate primarily over the next 30 years.” Financially stressed multiemployer pension plans would apply for both the loans and grants jointly. Certain plans in the direst financial situations would be required to apply. The loans and grants would be available only to plans that are in current financial distress; other plans would be eligible only for financial assistance available under current law.

Different parties, different views

Democrats have generally voiced strong support for the bill. They contend the serious financial situations faced by some multiemployer pension systems is chiefly due to the Great Recession and long-lasting market challenges that have harmed manufacturing and other blue-collar industries. They said that economic conditions in the last two decades have forced many employers offering these pensions to become insolvent themselves, which in turn left the multiemployer pension plans with fewer and more financially stressed contributing employers.2

Republicans, on the other hand, are concerned about alleged ongoing mismanagement on the part of union leaders and pension trustees. Ranking Member of the Ways and Means Committee Kevin Brady, R-TX, said that a loan program will do nothing to solve the underlying problems that have weakened many of the plans. Republicans commonly use the term “bailout” to describe the proposed program and suggest that a more effective approach would require more conservative actuarial and investment assumptions. They contend for many of these stressed pensions, plan trustees simply have not made sufficient plan contributions to meet future benefit obligations.

The conservative Heritage Foundation maintains that a better solution (than the RMPA) includes strengthening the PBGC to help ensure it can provide benefits when plans fail, adjusting the current rules governing multiemployer plans to avoid underfunding and allowing these plans to reduce benefits in ways that minimize pension losses across current and retired workers.3

Rep. Neal, Chairman of the House Ways and Means Committee, in turn insists that the RMPA is not a government bailout, but a backstop. The loans would be funded by bond sales in the open market. He observed that the bill is a “. . . common sense solution that brings together the public sector and private sector. Further inaction means many more Americans will risk slipping into poverty in retirement, even though they sacrificed throughout their careers.”2

Gene Kalwarski, the CEO of Cheiron (the actuarial consulting firm and a leading actuary to multiemployer plans cited earlier), observed that while conservative economists blame labor unions and employers for under contributing and the general financial troubles of multiemployer pension plans, it was the federal tax code (during the 1980s and 1990s) that limited employers’ tax-deductible contributions to multiemployer plans. Since the plans were constrained from contributing more (during a period of double-digit returns and large surpluses), they were forced to increase pension benefits or stop making contributions. In response to critics who argue the bill would allow struggling plans to make new pension promises and leave taxpayers on the hook if they can’t repay the federal loans, Mr. Kalwarski notes that the legislation would forbid plans that receive government help from increasing benefits or lowering contributions. Moreover, pension plans that receive government loans would be required to set aside money in dedicated portfolios to pay off their obligations to retirees.4

Outlook for the bill

Rep. Neal contends that the bill is a positive first step that can and should be built upon in a bipartisan manner. Given the opposition of Republicans in the House vote, it is not at all clear that the bill as written will succeed in the GOP-controlled Senate. Beyond the differing viewpoints of how to address the problem, the bill comes with a considerable price tag — the Congressional Research Service projects that the bill as passed by the House would increase the federal deficit by $64 billion over 10 years.5

The stakes are high. One report published by the Society of Actuaries identifies some 21 plans with approximately 95,000 participants that are projected to become insolvent by 2023, and 48 plans with approximately 545,000 participants that are projected to be insolvent by 2028.2 A recent report from the National Institute on Retirement Security shows that spending from retirees receiving income from multiemployer pension plans significantly helps the US economy. However, this support could be diminished or even turned into an economic drag if the multiemployer pension crisis is not resolved.6

The outlook for a solution is uncertain

Hopefully a bipartisan agreement addressing concerns from both sides of the aisle can find its way through Congress, although the odds of that happening soon (based on the terms of the current dispute) do not appear favorable at first look. However, there is resolve among both parties to reach a mutually agreeable solution, as many of their constituents are potentially affected by this issue. Industry groups and the US Chamber of Commerce (among others) are actively educating policy makers of both parties about the impact of the multiemployer pension funding crisis to employers, workers and the economy in an effort to lay the groundwork for a near-term solution. In addition, a resolution to appoint another joint congressional committee to tackle the relevant issues was recently introduced in the House.

We’ll keep you posted.

1 Invesco, “Washington Insights Winter 2019,” Jon Vogler, January 16, 2019
2 PlanSponsor, “House committee advances bill to establish union pension lifeline program,” John Manganaro, July 10, 2019
3 The Heritage Foundation, “The Rehabilitation for Multiemployer Pensions Act of 2019: no solution to America’s pension crisis,” Rachel Greszler, July 25, 2019
4 The Hill, “Setting the record straight about America’s multiemployer pension crisis,” Gene Kalwarski, July 8, 2019
5 NAPA Net, “CRS: Multiemployer pension bill would hike deficit by $64 billion,” John Iekel, July 26, 2019
6 PlanSponsor, “Lawmakers demand help for union pensions,” John Manganaro, Aug. 7, 2019

The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This is not intended to be tax advice. The information presented is based on current interpretation of federal tax law. State income tax laws may differ. Please consult your tax advisor for detailed information. Invesco representatives are not tax advisors. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax advisor for information concerning their individual situation.