House Subcommittee Reviews Multi-Employer Pension Plans

Friday, 04 Jan 2013 02:01 PM

By Robert Feinberg

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The House Committee on Education and the Workforce’s Subcommittee on Health, Employment, Labor and Pensions held a hearing recently on the condition of multi-employer pension plans in anticipation of considering the extension of existing legislation this year.

By way of background, in 1974 the Employee Retirement and Income Security Act (ERISA) was enacted to establish a pension program that would allow employees to take their pensions with them when they changed jobs. The idea was the brainchild of Kenneth Dam of the University of Chicago, who was working in the Nixon White House and thought it would be a good idea to provide workers with such a program.
 
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Coincidentally, I was a young legislative assistant on Capitol Hill and one of the first members of what was to become the Republican Study Group. As ERISA was about to come to the House floor, a memo I wrote warned of the moral hazard created by setting up a federal agency, the Pension Benefit Guarantee Corp. (PBGC), that would administer employer pension plans and take over those that failed.

It is necessary to distinguish the multi-employer plans that were the subject of this hearing from single-employer plans, which are much more significant and are subject to different rules.

Now, nearly 40 years later, Joshua Gotbaum, the jolly, optimistic, sometimes apologetic director of the PBGC (informally known as Penny Benny), testified as to how the agency is dealing with actual and potential plan defaults and with projected future shortfalls in the funding of multi-employer plans.

In his opening statement, Subcommittee Chairman Phil Roe, R-Tenn., said that the recent failure of Hostess, whose plan covered 18,000 employees and could create a $2 billion liability, serves as a reminder of the need to reform multi-employer plans, because employers leave unfunded liabilities that fall on other employers and cause them to leave the program. (This was exactly the prediction critics made in 1974.)

Rep. Bob Goodlatte, R-Va., mentioned the Central States fund as having hundreds of thousands of employees in jeopardy without referring to its background of corruption that resulted in a government takeover.

According to Roe, the PBGC has obligations of $7 billion, an increase of 57 percent over seven years, and the projected deficiency now stands at $34 billion. He urged that facts be assembled as quickly as possible and criticized the administration for being slow to provide reports on time. For example, a report that was due at the end of 2012 is now promised for the end of 2013.

The ranking Democrat, Rep. Rob Andrews, D-N.J., essentially agreed with Roe. He praised earlier reform legislation sponsored by Rep. John Boehner, R-Ohio, when he was chairman of the committee, but Andrews warned that poor economic performance in recent years, investments that have not kept pace with needs and retirements of employees all reduce financial support for the plans. Further, he observed that while there is no explicit federal guarantee for the plans, the moral hazard exists that a federal bailout could occur unless action is taken in advance to prevent it.

In his testimony, Gotbaum referred to the10 million employees in covered plans scattered all over the country and touted the benefits of enabling small employers to offer common plans and avoid the need to maintain expensive human resources functions.

The downside is that when plans fail, remaining participants are left with obligations to support the retirements of orphan workers, and these employees have been floating a federal bailout as a solution to the funding shortfall.

Instead, Gotbaum supports an extension of the Pension Protection Act (PPA), which expires in 2014. He presented charts showing that the overall health of plans has improved by using so-called “self-help” measures authorized by the PPA, such as stretching out the amortizing of fund obligations from 15 to 29 years.
 
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Gotbaum shyly admitted that the data needed to evaluate options for future reforms do not exist, because the PBGC is still mired in the era of typewriters and carbon paper.

Among the issues Roe listed as needing to be considered in the next Congress are the fact that premiums charged by the PBGC account for only 20 percent of payouts, and that the 7.5 percent returns assumed by many plans are unrealistic in light of the extended period of low interest rates that has prevailed for many years.

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