Billions of dollars some of the country’s most underfunded union-brokered plans are getting from the federal government’s private-sector pension insurer won’t last them the 30 years President
Instead, pension plans applying for and receiving special financial assistance funding are walking a tightrope to stretch out newly reinstated benefits as long as possible while balancing rising interest rates against future liabilities and legacy assets they already have.
The Pension Benefit Guaranty Corp. has already approved more than $6 billion for about two dozen underfunded multiemployer pension plans, according to agency records. That’s a tenth of the $94 billion bailout Congress expects to pay over the coming years under the 2021 American Rescue Plan Act (Pub.L. 117-2).
But the true cost of covering US union workers’ pension benefits until 2051 likely would total more than $280 billion, said Russell Kamp, managing director at Ryan ALM Inc., a Florida-based management firm.
“The intent of the legislation was to promise workers their benefits for 30 years,” Kamp said. “Under the interim final rule PBGC has issued, you’ll be lucky if you can secure benefits for 10 years. There’s no way on earth that you’re going to come close to achieving the ultimate objective of reinstating benefits that have been cut and paying out promised benefits for 30 years.”
The culprit behind the threefold funding gap is a maximum discount rate the PBGC established in July to help plans determine the amount of assistance they’ll need. The rate assumes pension investors will achieve a 5.5% return in equities, but restricts those special financial assistance investments to low-risk bonds that usually only return about 2.5%.
To pass the pension plan bailout through a split Congress last year, Democrats pitched the measure with a maximum $94 billion price tag, but the law they passed didn’t actually put any limit on how much it ultimately would cost. Lawmakers left it up to the PBGC to do the math and determine how much taxpayers would need to pay union workers’ promised benefits for a period of 30 years.
That put enormous pressure on an independent federal agency to come up with interest rates that would total no more than the $94 billion advertised, Kamp said. The PBGC hasn’t finalized its interim measure, but the pressure on the agency remains, he added.
“I don’t see the PBGC changing the rate in a final rule and being solely responsible for increasing the cost on taxpayers,” he said.
The PBGC didn’t immediately respond to a request for comment.
The investment constraints don’t take away from the real impact special financial assistance is already having on multiemployer plans, but it could modify when those plans apply for funding and how they invest their legacy assets once they receive it.
One of the earliest financial assistance recipients was an Idaho construction laborers plan based in Portland, Ore. The Idaho Signatory Employers-Laborers Pension Plan was projected to become insolvent later this year and slash retirees’ benefits by more than 20%.
About 700 plan participants got a $13.9 million early Christmas gift in late December.
“This money provides a bridge to restore retiree benefits and time to find a path to further correct the underfunding,” said Jane Ewers, a Turner, Stoeve & Gagliardi P.S. partner advising the plan.
Plans like that will need to aggressively invest their remaining assets to maximize profits and make up a total $30 million funding deficit, said Colyar Pridgen, a lead pension solutions strategist at the Capital Group Companies Inc.
Meanwhile, the inverse relationship between interest rates and funding liabilities could mean plans need to apply for assistance sooner rather than later to maximize the total financial assistance they’re due to receive, he said.
“I think some of these plans don’t want to be first, and in some ways that makes sense,” he said. “But to maximize return, plans must think strategically.”