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IBEW / NECA National Benefits Conference

January 31, 2013

Presented By:

Randy G. DeFrehnExecutive Director

National Coordinating Committee for Multiemployer Plans

Recommendations of the Retirement Security Review

Commission

January 30, 2013, 10:32 p.m. ET

Some Unions Grow Wary of Health Law They BackedBy 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

“Overall, union workers’rate of participation in retirementplans—at 80 percent—was greaterthan that of nonunion workers, whichwas 48 percent.”

Positive Correlation Between Union Representation and Pension Coverage

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?

“… 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 analysisindicates that the cost to deliver

the same level of retirementincome to a group of employees is

46% lower in a DB planthan 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.”

The More Efficient Approach

Current Challenges

PPA Zones

“Endangered” Status = Yellow Zone

“Critical” Status= 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

Net Position September 30, 2011 ($2.770 billion)

2011 Snapshot:Premium Income $92 millionInvestment Income $91 million

Total Assets $1.807 billionNew Liabilities ($2.467 billion)

Net Position September 30, 2012 ($5.237 billion)

Key Statistics:PBGC Multiemployer Guaranty Fund Net Program Financials

• “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.”

PBGC Annual Report 2012

Provisions For Deeply Troubled Plans

• Commission Recommends that if :a) A plan has taken all reasonable

measures to improve fundingb) Insolvency is still inevitablec) 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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