Policy Options for Multiemployer Defined Benefit Pension Plans
Released: 2018-09-12T00:00:00

Summary:
Multiemployer defined benefit (DB) pension plans are pensions sponsored by more than one employer and maintained as part of a collective bargaining agreement. In DB pensions, participants receive a monthly benefit in retirement that is based on a formula. In multiemployer DB pensions, the formula typically multiplies a dollar amount by the number of years of service the employee has worked for employers that participate in the DB plan.
The Pension Benefit Guaranty Corporation (PBGC) is a federally-chartered corporation that insures participant benefits in private-sector DB pension plans. Although PBGC is projected to have sufficient resources to provide financial assistance to multiemployer DB plans through 2025, the projected insolvency of many multiemployer DB pension plans will likely result in a substantial strain on PBGC's multiemployer insurance program. In a report released in June 2017, PBGC indicated that the multiemployer insurance program is highly likely to become insolvent in 2025. In the absence of increased financial resources for PBGC, participants in insolvent multiemployer DB pension plans would likely see sharp reductions in their pension benefits.
As a result of a variety of factors—such as the recessions in 2001 and from 2007 to 2009—about 10% to 15% of multiemployer plan participants are in multiemployer DB plans that are likely to become insolvent over the next 19 years and run out of funds from which to pay benefits owed to participants.
The Bipartisan Budget Act of 2018 (P.L. 115-123), enacted February 9, 2018, created the Joint Select Committee on Solvency of Multiemployer Pension Plans to address the impending insolvencies of several large multiemployer DB pension plans and PBGC. The committee must provide to Congress no later than November 30, 2018, a report and proposed legislative language to improve the solvency of multiemployer DB plans and the PBGC. The report and proposed legislative language must be approved by (1) a majority of committee members appointed by the Speaker of the House and Majority Leader of the Senate and (2) a majority of committee members appointed by the Minority Leader of the House and Minority Leader of the Senate. P.L. 115-123 provides for expedited procedures in the Senate if the committee approves of the proposed legislative language. There are no provisions that provide any special procedures governing House consideration of such legislation.
Many policy options have been discussed in committee hearings and in the multiemployer pension plan community by policymakers and stakeholders. Not all options directly address the solvency of financially distressed multiemployer plans or PBGC, but they could be considered as part of a comprehensive package of policy options. The options include
assistance for financially troubled multiemployer plans with subsidized loans or partitions; changes to the maximum benefit limit imposed on plans when they receive PBGC financial assistance; changes to PBGC's premium structure; stricter funding rules; and alternative pension plan designs.

subsections: section_title: Introduction
paragraphs: Pension plans are classified by whether they are sponsored by one employer (single-employer plans) or by more than one employer (multiemployer and multiple employer plans). Multiemployer pension plans are sponsored by employers in the same industry and maintained as part of a collective bargaining agreement. Multiple employer plans are sponsored by more than one employer but are not maintained as part of collective bargaining agreements. This report focuses on multiemployer plans.
Pension plans may also be classified according to whether they are defined benefit (DB) or defined contribution (DC) plans. With DB plans, participants receive regular monthly benefit payments in retirement (which some refer to as a "traditional" pension). With DC plans, of which the 401(k) plan is the most common, participants have individual accounts that are the basis of income in retirement. DB plans are the subject of this report.
subsections: section_title: Background on Multiemployer Plans
paragraphs: In 2017, there were an estimated 10.6 million participants in 1,374 multiemployer plans. Multiemployer DB pensions are of current concern to Congress because approximately 10% to 15% of participants are in plans that are in critical and declining status and may become insolvent within 19 years. When a multiemployer pension plan becomes insolvent, the Pension Benefit Guaranty Corporation (PBGC), a federally-chartered corporation that insures private-sector DB pension benefits, provides financial assistance to the plan so the plan can continue to pay promised benefits, up to a statutory maximum. Currently, plans that receive PBGC financial assistance can provide up to $12,870 per year for an individual with 30 years of service in the plan. The guarantee is not indexed for changes in the cost of living and was last increased in 2000.
At the end of FY2017, PBGC reported a deficit of $65.1 billion in the multiemployer insurance program. 7FThe Congressional Budget Office (CBO) provided several estimates (using different accounting methods) of PBGC's financial condition. 8FCBO's cash-based estimates account for spending and revenue in the years when they are expected to occur. CBO estimates that from 2017 to 2026, PBGC will be obligated to pay $9 billion in claims but will only have sufficient resources to pay $6 billion. From 2027 to 2036, CBO cash-based estimates indicate that claims to PBGC will be $35 billion but PBGC will only have sufficient resources to pay $5 billion. CBO also provided fair-value estimates, which are the present value of all expected future claims for financial assistance, net of premiums received. CBO's fair-value estimate of PBGC's future obligations was $101 billion. There is no obligation on the part of the federal government to provide financial assistance to PBGC.
Because of the projected plan insolvencies, PBGC has projected that it will likely not have the resources to provide sufficient financial assistance to insolvent plans at the maximum guarantee level beginning in 2025. In such a scenario, most participants would receive less than $2,000 per year because PBGC would be able to provide annual financial assistance equal only to its annual premium revenue, which was $291 million in FY2017. 
In addition, employers in plans that are projected to become insolvent might exit such plans based on concerns that they may have to pay increasingly larger amounts of withdrawal liability if they remain. 12FSome experts refer to a multiemployer plan "death spiral" as an increasing number of employers leave financially-troubled multiemployer plans in order to avoid larger future obligations to the plans.
This report is not intended to be an exhaustive presentation of the many policy options that stakeholders have offered. This report provides an overview of policy options that have been discussed in committee hearings and in the multiemployer pension plan community by policymakers and stakeholders, including options that would provide assistance for financially-troubled multiemployer plans with subsidized loans, direct financial assistance, or partitions (which would transfer some participant's benefits to a newly created plan); changes to the maximum benefit limit imposed on plans when they receive PBGC financial assistance; changes to PBGC's premium structure; and stricter funding rules and alternative pension plan designs. Table 1 provides a summary of these selected policy options.
section_title: The Joint Select Committee on Solvency of Multiemployer Pension Plans
paragraphs: In response to the increasing concerns of policymakers and stakeholders (such as participants, participating employers, and plans), the Bipartisan Budget Act of 2018 ( P.L. 115-123 ) created a new joint select committee of the House and Senate: The Joint Select Committee on Solvency of Multiemployer Pension Plans. The committee has 16 Members of the House and Senate—four chosen by each of the chambers' party leaders—and is tasked with formulating recommendations and legislative language that will "significantly improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation." The committee is required to vote on a report containing findings, conclusions, recommendations, and legislative language to carry out the recommendations by November 30, 2018. Provided the report is agreed to by a majority of committee members from each party, P.L. 115-123 contains procedures for expedited consideration of the legislative text in the Senate, though there are no such provisions for consideration in the House.
section_title: Possible Effects of Inaction
paragraphs: Some Members of Congress have said that doing nothing is not an option. In the absence of enacted legislation, beginning in 2025 when PBGC is projected to run out of resources, the benefits that are owed to participants in insolvent plans will be far greater than the PBGC's resources. At the end of FY2017, PBGC's multiemployer program had $2.3 billion in assets and received $291 million in premium income in that fiscal year. Once its assets are exhausted, PBGC would be able to provide financial assistance to plans equal only to the amount of its premium revenue. PBGC indicated that most participants would receive less than $2,000 per year. Further, some policy analysts have raised concerns about possible contagion effects that may exacerbate an already large problem: The insolvency of a multiemployer plan could cause large withdrawal liability assessments for the employers in that plan. If these increased withdrawal liability assessments cause financial distress for some of these employers, it could affect their contributions to other multiemployer plans in which they participate. In addition, withdrawal liability amounts might need to be disclosed in employers' financial statements, which some have suggested could limit these employers' access to credit.
Some policymakers have noted that a solution to the issues created by the projected insolvencies of multiemployer plans likely will present challenges to stakeholders. For example, Senator Orrin Hatch indicated that, "there are no magic bullets, and any solutions we come up with are bound to make at least some people unhappy." Others, for example Representative Marcy Kaptur, have called for a "shared sacrifice" approach. The considerable size and nature of the problem likely requires some concession from all stakeholders: employers, plans, participants, and U.S. taxpayers. Finding the balance needed to gain the buy-in from each group of stakeholders is likely to be a complex process, but critical to the success of the Joint Select Committee.
Some stakeholders argue against providing loans or financial assistance to multiemployer plans. Their concerns include the following: a loan program for multiemployer plans could be viewed as a bailout, particularly if there are provisions that provide for forgiveness of part or all of a loan; loans and financial assistance to multiemployer plans would be too costly for U.S. taxpayers; and there is no precedent for the U.S. government providing financial assistance to private-sector pension plans, which could lead to proposals for financial assistance to underfunded state and local government pension plans.
subsections: section_title: Costs to Certain Employers If Participants' Benefits Are Reduced
paragraphs: Several employers have promised to offset benefit reductions for certain former employees in some multiemployer pension plans to which the employers had previously contributed. These employers could benefit financially if proposals to assist financially-troubled plans were enacted and did not include any benefit reductions (for example, some of the proposals do not require any benefit reductions for participants in plans that receive a loan or are partitioned). United Parcel Service (UPS) and Kroger are two employers that withdrew from the Central States multiemployer plan and, as part of their agreement to leave the plan, agreed to offset reductions in pension benefits to certain former employees in the plan. If proposals are enacted that do not reduce participants' benefits, participants in Central States would receive their full benefits so these employers would not need to offset any benefit reductions.
In the absence of any financial assistance to PBGC or to Central States, the offsets these companies would have to provide could be very large. For example, UPS indicated in its 2016 Annual Report that its obligation could be about $4.0 billion. Kroger announced the agreement in December 2017 and has not indicated the amount of its potential financial responsibility.
section_title: Policy Option: Assist Financially Troubled Plans
paragraphs: Policy options to assist financially-troubled plans include (1) loans subsidized by the federal government and direct funding and (2) partitions, which would remove specified liabilities from financially-troubled plans.
subsections: section_title: Loans and Financial Assistance to Financially Troubled Plans
paragraphs: Two proposals introduced in the 115 th Congress would direct the U.S. Treasury to provide loans to financially-troubled plans. The loan programs differ in the loan amounts and the extent, if any, of reductions to participants' benefits. An important consideration to the effectiveness of this approach is whether plans that receive loans will be able to accumulate sufficient funds to repay the loan principal when it is due. 
One proposal would allow any plan in critical and declining status to receive loans and the other would provide loans only to the United Mine Workers of America (UMWA) 1974 Plan, a multiemployer pension plan covering members of the UMWA. The National Coordinating Committee for Multiemployer Plans and UPS have each offered loan program solutions; these have been discussed by policymakers, but are not currently in legislative form.
subsections: section_title: S. 2147, the Butch-Lewis Act of 2017, and H.R. 4444, the Rehabilitation for Multiemployer Pensions Act
paragraphs: S. 2147 , the Butch Lewis Act of 2017, introduced on November 16, 2017, by Senator Sherrod Brown and H.R. 4444 , the Rehabilitation for Multiemployer Pensions Act, introduced on November 16, 2017, by Representative Richard Neal are related bills containing nearly identical provisions that would establish the Pension Rehabilitation Authority (PRA) in the U.S. Treasury. The PRA would provide loans to multiemployer plans. The loan amount would be equal to the total lifetime amount of benefits for participants who are receiving plan benefits at the time of the loan (referred to as participants in pay status ). If the loan amount were insufficient to prevent the plan from becoming insolvent, the plan could also receive financial assistance from PBGC, although it is uncertain whether the PBGC financial assistance would be repaid. The bills would require the plan to (1) use the loan proceeds to either purchase annuities for participants in pay status or (2) keep the loan proceeds in a portfolio that would be unlikely to lose value. The plan would pay interest for 29 years and repay the loan principal in year 30.
S. 2147 and H.R. 4444 would not reduce participants' benefits from the amount earned by the participants in the plan, including benefits in plans that receive PBGC financial assistance in addition to a PRA loan. Plans that received approval for benefit suspensions under the Multiemployer Pension Reform Act of 2014 (MPRA; passed as part of P.L. 113-235 ) would be required to apply for loans and those benefit reductions would be restored in such plans that received loans.
Plans could accumulate funds to repay the loan principal from the investment proceeds of plan assets. Plans that receive loans would have larger amounts of plan assets from which to invest because in the first years of the loan term, benefit payments would be paid mostly from loan proceeds, which would free up plan assets to be invested. This would allow any investment earnings on invested plan assets to be used toward loan repayment.
S. 2147 and H.R. 4444 would not require any changes to the funding rules for multiemployer plans. CBO prepared a preliminary analysis of S. 2147 and estimated that the bill "would probably increase [federal] deficits by more than $100 billion over the 2019-2028 period." However, the estimate noted that it is possible that few plans would qualify for loans, which would substantially lower the cost estimate. In addition, CBO noted several uncertainties around key elements of the bill (such as when financial assistance payments would be made) and that the formal cost estimate could differ substantially.
section_title: S. 1911 and H.R. 3913, the American Miners Pension Act of 2017
paragraphs: S. 1911 and H.R. 3913 , the American Miners Pension Act of 2017, introduced on October 3, 2017, by Senator Joe Manchin and Representative David McKinley, would, among other provisions, provide financial assistance to the United Mine Workers of American (UMWA) 1974 Pension Plan from two U.S. Treasury sources: (1) direct financial assistance from the General Fund and (2) loans.
The amount to be transferred from the Treasury to the UMWA 1974 Plan would be any amount remaining within an annual cap of $490 million after funds are first transferred from the General Fund to three UMWA multiemployer health plans and to certified states and tribes that have reclaimed their priority abandoned coal mining.
In addition to the Treasury transfers, S. 1911 and H.R. 3913 would require, beginning in FY2018, the Secretary of the Treasury to make an annual loan to the 1974 Plan to prevent the plan's insolvency. The terms of the loans would be as follows:
Each annual loan would be for the amount that the 1974 Plan trustees determine "to be necessary to prevent the insolvency of" the plan in that year. The maximum amount of each annual loan would be $600 million. The interest rate charged to the plan would be 1% per year. The term of each loan would be 30 years with interest-only payments for the first 10 years.
section_title: National Coordinating Committee for Multiemployer Plans Loan Proposal
paragraphs: The National Coordinating Committee for Multiemployer Plans (NCCMP), a nonpartisan advocacy group representing multiemployer plans, proposes a loan program that would provide plans loans at 1% interest. The repayment would be over 30 years, with interest only payments for the first 15 years. NCCMP stated that, "the entire premise of the loan program is to allow a Plan to borrow enough money at 1% and invest at a higher rate that will allow the Plan to earn their way through the funding problems that they face…" The proposal presents three alternatives, which vary to the extent, if any, benefit reductions are used to offset the credit subsidy cost.
section_title: Curing Troubled Multiemployer Pension Plans Loan Proposal
paragraphs: A UPS proposal would provide loans to multiemployer plans in critical and declining status and whose actuary certifies that the loan would correct the plan's funding issues and can be repaid.
The loan would be for an amount equal to five times what the proposal calls the shortfall : (1) the total amount of contributions in the year prior to the loan plus (2) the amount of projected earnings on plan investments in the year immediately following the loan, minus (a) projected benefit payments and (b) reasonable administrative expenses. The interest rate on the loan would be 1% and would be repayable over 30 years, with interest only payments for the first five years. After five years, a plan could apply for a second loan if the plan remains in critical and declining status. Ten years after the initial loan, a plan could apply for a third, and final, loan if it were still in critical and declining status. Benefit payments would be reduced by 20% for all participants.
The proposal includes a risk reserve pool, which is a sum of money set aside from contributions by employers, participants, and unions in the event a plan cannot repay its loan in full. If a plan were unable to make 100% of its yearly loan repayment, it could request funds from the pool to make the payment in full.
The risk reserve pool would be drawn from all multiemployer plans, regardless of zone status, and would be funded by the following annual payments:
a $7 increase in the per participant PBGC premiums paid by the pension plan, an employer payment of $2 per month ($24 per year) per active participant, a participant payment of $2 per month ($24 per year), and a union payment of $2 per month ($24 per year) per active participant.
section_title: Plan Partitions
paragraphs: Multiemployer plans can apply to PBGC to be partitioned. A plan partition involves creating a second plan (called a successor plan) and transferring some amount of the original plan's benefit obligations to the successor plan. Benefits are reduced to the maximum allowed under Multiemployer Pension Reform Act of 2014 (MPRA). The successor plan receives PBGC financial assistance to pay participants' benefits up to the PBGC maximum guarantee levels. The original plan pays (1) the benefits to participants remaining in the original plan and (2) the amount of participants' benefits above the PBGC maximum guarantee up to the amount of the reduced benefit.
For PBGC to approve a plan partition, the following conditions must be met:
the plan is in critical and declining status; PBGC determines that the plan sponsor has taken (or is taking) all reasonable measures to avoid insolvency; PBGC determines that a partition will reduce PBGC's expected long-term loss and is necessary for the plan to remain solvent; PBGC certifies to Congress that PBGC's ability to meet existing financial assistance obligations to other plans will not be impaired by the partition; and, the cost of the partition is paid exclusively from PBGC's multiemployer fund.
Given the expected insolvency of PBGC's multiemployer insurance program, the condition that a partition will not impair PBGC's ability to meet existing financial assistance obligations likely limits the use of partitions. However, if PBGC were given sufficient resources, partitioning plans could allow PBGC to intervene in troubled plans prior to the point of plan insolvency. Under current law, PBGC provides financial assistance to multiemployer plans once they exhaust assets and become insolvent. For comparison, in PBGC's single-employer program, PBGC can initiate termination proceedings for an involuntary termination if for example, the long-run loss to the PBGC "may reasonably be expected to increase unreasonably if the plan is not terminated."
Some policy analysts have suggested that PBGC's partitioning authority should be expanded to preserve the portion of a financially-troubled multiemployer plan that contains participants with employers active in the plan, which could result in a financially-sound original plan.
One of the benefits of allowing PBGC to partition plans prior to insolvency could include possibly saving PBGC money, because plans could be required to reduce benefits prior to plan insolvency (as in the current practice). Under current law, benefits are transferred to the successor plan so that the original plan is projected to remain solvent. The original plan might still have participants whose employer no longer participates in the plan (called orphan participants). However, if the benefits of orphan participants were to be transferred to the successor plan, then all participants in the original plan would have an employer that was contributing that plan. If needed, a combination of benefit reductions or increased employer contributions could make the original plan well-funded. Once the original plan was well-funded, then changes to funding rules could be applied so that the original plan does not become financially-troubled in the future.
S. 1076 , the Keep Our Pension Promises Act, introduced by Senator Bernie Sanders on May 9, 2017, and H.R. 2412 , also the Keep Our Pension Promises Act, introduced on May 11, 2017 by Representative Marcy Kaptur, are identical bills that would, among other provisions, allow for the partitioning of plans in critical and declining status and create a legacy fund within PBGC to cover the administrative and benefit costs of the partitions. The legacy fund would be financed by changes to the tax code. The bills do not specify which benefits would be transferred to the partitioned plan or which benefits would remain in the original plan.
The bills would not require any benefit reductions: participants would receive their full benefits as promised by the plan. In addition, plans that were approved for benefit reductions under MPRA would be required to apply for partitioning and restore the benefits that had been reduced.
section_title: Policy Option: Change PBGC Maximum Benefit
paragraphs: A multiemployer plan that receives financial assistance from PBGC must reduce participants' benefits according to a formula based on the number of years of service in the plan. The formula is for each of service in the plan 100% of the first $11 of the participant's monthly benefit plus 75% of next $33 of the monthly benefit rate. For example, a participant with 30 years of plan participation could receive up to (30*(100% * $11 + 75% * $33)) per month or $12,870 per year. Participants with more (or fewer) years of service in the plan would receive a larger (or smaller) maximum benefit. For comparison, the multiemployer maximum benefit is lower than that for the single-employer program: the single-employer maximum benefit is about $65,000 per year for individuals who receive their benefits as single-life annuities beginning at the age of 65.
The multiemployer guarantee is not indexed to inflation and was last increased in the Consolidated Appropriations Act, 2001 ( P.L. 106-554 ). As the dollar amount of participants' benefits have increased, an increasing number of participants are likely to see their benefits reduced as a result of the maximum guarantee. Using 2013 data, PBGC estimated that 79% of participants in multiemployer plans that were receiving financial assistance receive their full benefit as earned in the plan. Among participants in plans that were terminated and likely to need financial assistance in the future, 49% of participants have a benefit below the PBGC maximum guarantee, and 51% have a benefit larger than the PBGC maximum guarantee. Among ongoing plans (neither receiving PBGC financial assistance nor terminated and expected to receive financial assistance), the average benefit is almost twice as large as the average benefit in terminated plans. This suggests that a larger percentage of participants in plans that receive PBGC financial assistance in the future are likely to see benefit reductions as a result of the PBGC maximum guarantee level.
Although there are currently no proposals to increase PBGC maximum benefit, some policymakers have indicated that it is too low. For example, Senator Sherrod Brown called the multiemployer guarantee "miniscule" and a Government Accountability Office (GAO) report cited experts who described the guarantee level as low and that the "significant increase in premiums since 2005 did not coincide with a comparable rise in the benefit guaranty." The effect on household incomes imposed by solvency-driven benefit reductions could be partly offset by increases in the PBGC maximum benefit guarantee.
section_title: Policy Option: Change PBGC Premium Structure
paragraphs: Because of PBGC's role as the insurer of multiemployer DB benefits, it has been a focus of discussions regarding the solvency of multiemployer plans.
Multiemployer plans currently pay a flat-rate premium to PBGC of $28 per participant per year. The PBGC multiemployer premium was $2.60/participant from 1988 to 2005, $8.00/participant in 2006 and 2007, $9.00/participant from 2008 to 2012, $12.00/participant in 2013 and 2014, $26.00/participant in 2015, $27.00/participant in 2016, and $28.00/participant in 2017 and 2018. In FY2017, PBGC received $291 million in premium revenue.
Proposals for changes to PBGC premiums include the following new premiums: (1) a variable-rate premium based on the amount of underfunding in a plan, (2) an exit premium when an employer leaves a multiemployer plan, and (3) a risk-based premium based on the riskiness of a pension plans' investment portfolio. Although increased PBGC's premium revenue could delay its projected insolvency, employers' concerns mean that it is likely not feasible for premiums to rise to a level sufficient to ensure the multiemployer program's long-term solvency.
subsections: section_title: Variable-Rate Premium
paragraphs: The FY2019 budget proposed a new variable-rate premium based on the amount of underfunding in a multiemployer plan. The budget does indicate the amount of the premium. The amount of the premium would be capped, though the budget does not specify the amount of the cap.
section_title: Exit Premium
paragraphs: The FY2019 federal budget also proposed an exit premium that would be paid by employers that leave a multiemployer plan. The purpose of the exit premium is to compensate PBGC for the additional risk imposed on it when employers exit a plan. The exit premium would be equal to 10 times the amount of the variable-rate premium cap. The budget does not specify the amounts of the exit premium, although it noted that the new variable-rate and exit premiums would ensure the solvency of the multiemployer program for 10 years.
section_title: Risk-Based Premium
paragraphs: Some policymakers have suggested a premium based on the riskiness of a multiemployer pension plan's investment portfolio. The rationale behind this premium is the lower the risk of a plan's investments, the lower the likelihood that the plan would become insolvent and require PBGC financial assistance.
Premiums based on the amount of plan underfunding and the riskiness of a plan's investment portfolio could incentivize multiemployer plans to become well-funded and conservatively invested: a plan that is 100% funded and invested in low-risk assets is of little risk of becoming insolvent and needing PBGC financial assistance. Even if employers left the plan, the benefits of orphan participants would likely not become underfunded because of the low-risk investments. Variable-rate and risk-based premiums would likely be a relatively low dollar amount for plans with such finance structures.
section_title: Policy Option: Prevent Future Insolvencies
paragraphs: A major contributor to the current multiemployer problem was the December 2007 to June 2009 economic recession. A survey of 392 multiemployer plans indicated that in 2007 they had 56.7% of their assets invested in equities. The accompanying stock market downturn resulted in large losses to plan investments. In addition, the number of employers participating in multiemployer plans likely decreased as a result of business bankruptcies, leaving larger amounts of orphan liabilities.
subsections: section_title: Strengthen Funding Rules
paragraphs: In the absence of changes to plan design (such as variable benefit or composite plans, discussed below) two factors would need to be present to ensure that DB pension plans do not have large amounts of unfunded liabilities and are not at risk of becoming insolvent. Plans would need to be (1) 100% funded and (2) invested in relatively safe assets. A plan that is 100% funded would have sufficient funds from which to pay 100% of the promised benefits. A plan that is invested in relatively safe assets (e.g., investing in investment grade or better corporate debt and avoiding equities) would probably never face a situation where its investment portfolio incurred anything other than minor losses.
The effects of stricter funding requirements would likely include some combination of (1) increased required employer contributions to plans to provide benefits similar to today's promised benefits or (2) decreased promised benefits to participants. Some stakeholders might find these tradeoffs worthwhile, as some participants currently face a less than 100% chance of receiving their full benefit as earned in a plan. Other stakeholders might find these requirements onerous, too costly to impose on employers and plans, and too large a loss for plan participants.
subsections: section_title: Discount Rate to Value Plan Benefit Obligations
paragraphs: A pension plan's benefits are a plan's liabilities spread out over many years in the future. These future benefits are calculated and reported as current dollar values (also called present value). The discount rate is a key assumption in determining the present value. The Internal Revenue Code (IRC) does not require multiemployer pension plans to use a specific discount rate to value their future benefit obligation. The assumptions a plan uses must be reasonable and offer the best estimate of the plan's expected experience and, in practice, multiemployer plans generally discount plan liabilities using the expected rate of return on the plan's assets.
Pension policy experts have several viewpoints on the appropriate discount rate that pension plans should use to value plan liabilities. The higher the discount rate a plan uses the lower the present value of those benefit obligations. Using a lower discount rate would likely result in either increases in required employer contributions to plans or lower benefits that could be promised in the future.
These discussions, generally speaking, have been between actuaries and economists. Broadly speaking, some actuaries recommend that pension plans discount future benefits using the expected rate of return on plan investments (which is the current practice for multiemployer DB pension plans). Some financial economists, by contrast, recommend that plans discount the liabilities using a discount rate that reflects the likelihood that the benefit obligation will be paid; in general, this would be a lower rate than currently used. Some Members of Congress have also suggested that the rate that multiemployer plans use to discount their benefits may be too high.
section_title: Alternative Plan Designs: Variable Benefit and Composite Plans
paragraphs: As an alternative to stricter funding requirements, plans would not become underfunded if participants' benefits fluctuated with the plan's investment performance. For example, one plan design has a conservative assumed investment return (called a hurdle rate). Benefits are adjusted upwards if the investment returns are above the hurdle rate and benefits are reduced if the plan's investment returns are below the hurdle rate. Employer contributions could be unchanged in either scenario.
Although this plan structure is available under current law (and is referred to as a variable annuity benefit plan) they are not common among DB plans.
In addition, legislation has been introduced to allow for composite pension plans, which, like variable annuity plans, combine features of defined benefit and defined contribution pension plans.
H.R. 4997 , the Giving Retirement Options to Workers Act of 2018 (or GROW Act), would allow multiemployer DB plan sponsors to add a composite plan to their pension plan The composite plan would be a type of plan that provides plan sponsors with options, such as reductions in benefits or negotiated employer contributions, which would keep the plan funded at 120% if the plan's funding ratio fell below that level.
The appeal of these alternative plan structures is that they provide plan sponsors with certainty regarding the amount of their annual contributions. In addition, the composite plan proposal would not be covered by PBGC (and the plan would not pay PBGC premiums) and employers would not be subject to any withdrawal liability.
Participants in variable annuity benefit and composite plans would be protected against longevity risk: they would have the certainty that they would receive benefit payments for life, although the dollar amount of the benefit payments would not be certain. Because benefits in composite plans are not guaranteed, some might suggest that a composite plan's investment strategy (e.g., the amounts and types of plan investments) should be more conservative than in a traditional DB pension plan. One concern is that participants could be subject to potentially large benefit reductions, particularly if the stock market were to experience a steep decline. This concern could be alleviated by requiring plans to invest some or all of their portfolios in conservative investments to try to ensure a specified level of benefit.