The Center for Retirement Research at Boston College has produced a brief in which it promotes the idea that the Pension Benefit Guarantee Corp. be allowed to adopt orphaned pension accounts in multiemployer plans as a way to head off its insolvency.
By "partitioning" orphaned employees of businesses that have willfully left their MEP, or done so through bankruptcy, underfunded plans could shed some of their pension obligations. With fewer distressed MEPs to worry about, the PBGC could then stave off its own financial woes.
The Center for Retirement Research brief suggested that orphaned participants account for as much as 20 percent of the liabilities in MEPs. One particularly troubled plan pays 40 percent of its benefits to orphaned participants.
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"Removing orphaned participants has a lot of appeal," wrote Alicia Munnell, director of CRR, and Jean-Pierre Aubry, assistant director.
"It has been clear for decades that the withdrawal liability procedure is flawed and bankrupt firms often pay little to nothing. It seems unfair to burden current workers and their employers with legacy costs over which they had no control," reasoned the authors.
The brief from the CRR, the third in a series of four addressing potential solutions to problems in MEPs covered by the PBGC, points out that the agency's recent annual report said there are 173 MEPs that are currently insolvent and receiving PBGC assistance, are currently terminated and can't afford future payments, or have a projected insolvency rate in the next 10 years.
Some have suggested the PBGC's projected insolvencies to be exaggerated. Low interest rates have hampered funding status, argue PBGC critics, and those rates will only go up in the future.
Whether PBGC's projections are accurate or not, the CRR writes that insolvency for the MEP insurance program is almost guaranteed by 2025, no matter how changing interests rates and market returns may benefit the plans.
"The PBGC will not be able to cover its scheduled payments over the next 10 years with its $1.7 billion in assets and $90 million in annual contributions," said the CRR.
But the benefits of partitioning, while attractive to some, have real limits.
Some see partitioning as a way to immediately improve the funding status of MEPs. Others argue that it is an improbable fix, and that it would only accelerate PBGC's own insolvency.
"PBGC does not have the resources to cover orphaned liabilities for all severely underfunded plans," the CRR acknowledged.
Most of the proposals in favor of partitioning would only move those orphans of bankrupt employers off the books of troubled MEPs, said the CRR. That would only address some of the problem, as there would still be the issue of orphaned employees from non-bankrupt employers.
Also, those moved to PBGC's books would likely experience a significant reduction in benefits.
PBGC's benefit assistance program for MEPs is much less generous than it is for its single-employer insurance program.
On average, the highest annual guarantee of assistance for MEPs participants is $12,870. When it steps in to help a floundering MEP, the PBGC assumes none of that MEP's assets.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
