Solutions, Not Bailouts: Congressional Hearing Probes Solutions for Frozen, Multiemployer DBs

By Nevin Adams • September 18, 2014 • 0 Comments
Much is said and written about the demise of DB plans, but a recent House subcommittee hearing was focused on ways to help sustain the programs still in place.

The hearing — held Sept. 17 by the Select Revenue Measures Subcommittee of the House Committee on Ways & Means — was largely devoted to talking about two specific issues:

• nondiscrimination testing issues impacting plans that had been “soft” frozen (i.e., closed to new hires); and
• the funding and structural challenges confronting multiemployer plans.

‘Soft’ Scrubbed?

Deborah Tully, Director of Compensation, Benefits Finance and Accounting Analysis at Raytheon, explained that — like many other firms — they had closed their DB plan to new employees beginning in 2007, while continuing to offer that benefit to employees hired before that year. She explained that for a plan closed to new participants, each of the nondiscrimination tests gets more difficult to pass over time because the group of employees earning benefits under a closed plan will gradually have longer service and will have earned compensation increases over their careers due to promotions, seniority or cost of living increases. Those increases will cause many employees to be treated as highly compensated for purposes of nondiscrimination testing — a situation that generally does not arise with these plans as newer, lower-compensated workers continue to enter the plan when it’s open.

Over time, plans that historically have covered a nondiscriminatory group risk failing these tests simply because of the aging of the plan population, a process that ultimately could jeopardize the tax-qualified status of the plan unless the employer makes changes, Tully said.

She noted that today there are limited practical options — interim steps such as such as removing some highly compensated employees from the plan or changing certain features of the plan — but that “ultimately many employers choose to fully freeze their plans, since this is the only permanent solution to the problem.”

Potential Solutions

Tully noted that in December 2013 the U.S. Treasury Department issued temporary nondiscrimination relief through 2015 for certain closed DB plans, allowing employers to “cross test” — that is, combine their DB and their DC plans for purposes nondiscrimination testing, as long as the plan satisfied certain criteria before the end of 2013.

While Tully explained that the relief was helpful, she noted that it fell short of being a complete solution since it is short-term in nature and does not address all of the testing requirements. She said that H.R. 5381, introduced by subcommittee chairman Rep. Pat Tiberi (R-Ohio) and Ranking Member Richard Neal (D-Mass.), “addresses many of these nondiscrimination testing concerns by liberalizing the rules under which employers use cross testing for their closed plans, and by allowing the benefits, rights and features that are available only to a closed group of employees to be considered nondiscriminatory if the group was nondiscriminatory at the time the plan was closed.”

Scott Henderson, Vice President of Pension Investments and Strategy at the Kroger Co., began his testimony citing “the crisis facing the multiemployer pension system.” He explained that, before ERISA and the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) were enacted, an employer’s obligation to a multiemployer plan was generally limited to the contribution obligation established in its collective bargaining agreement (CBA), and that if the employer terminated participation in a multiemployer plan following the expiration of its CBA, the employer did not have any further liability to the pension plan.

However, Henderson noted that these days the “last man standing” rule effectively saddles the remaining employers in a multiemployer plan with potential liability for pension obligations of workers and retirees that never worked for the remaining employers, or who may have worked for a competitor of the employers, or who may have worked in a completely different industry than the employers. “This shifting of risk to the remaining employers places an unfair burden on these employers, and depending on their financial condition, could threaten their continued viability,” he said, going on to explain that this situation has also discouraged the entry of new employers into multiemployer plans.

Henderson also noted that the Pension Benefit Guaranty Corporation’s traditional role in providing a secondary support to these programs is at risk in that the 2013 Projections Report projects that the PBGC’s deficit for its multiemployer program will equal $8.3 billion and will widen to (on average) $49.6 billion by FY 2023.

‘Solutions, Not Bailouts’

By way of solutions, Henderson cited a package issued by the National Coordinating Committee for Multiemployer Plans (NCCMP) in February 2013, titled “Solutions Not Bailouts,” whose recommendations fell into three categories:

* proposals to strengthen and enhance the current multiemployer system;
* measures to assist deeply troubled plans; and
* new structures to foster innovative plan designs.

Additional testimony was presented by Dale Hall, the Society of Actuaries’ Managing Director of Research, primarily regarding the development of new mortality tables; and by Jeremy Gold of Jeremy Gold Pensions, whose central message was that liabilities are understated by as much as 50% and annual costs are underestimated by as much as 100%. “Good policies cannot be based on bad numbers,” Gold said. The final witness was Diane Oakley, Executive Director of the National Institute on Retirement Security, who focused on the role of DB plans.

Among the questions and comments during the Q&A session that followed the testimony:

* Rep. Erik Paulsen (D-Minn.) asked the panel what we might expect employers to do based on the new longevity numbers. The consensus was, of course, that it would depend on the employer’s plan design(s) and workforce demographics.
* Rep. John Larsen (D-Conn.) offered a cautionary note on making changes, quoting UCLA coaching great John Wooden who said, “you must be quick, but not hurry.” Larsen noted that all multiemployer stakeholders were not yet on board with the items in the NCCMP proposal.
* Rep. Aaron Schook (R-Ill.) asked Henderson what Kroger had done to communicate the potential issues with the multiemployer system, noting that it was generally easier to get Congress focused on dealing with a difficult issue when they are hearing about it from voters.

More details about the hearing, as well the witnesses’ written testimony, are available here; details about submitting written testimony to the Subcommittee are here.