Last week, Rep. John Kline, R-MN, chairman of the House Committee on Education and the Workforce, and co-sponsor of the controversial 2014 Multiemployer Pension Reform Act, released a discussion draft — or a proposal on proposed legislation — that would reform how collectively bargained pension plans are designed.
The draft proposes to amend the Employee Retirement Income Security Act to allow multiemployer plans to deploy a so-called composite plan design.
The composite option, which marries components of defined benefit and defined contribution plans, was first circulated in 2013, in a brief issued by the National Coordinating Committee for Multiemployer Plans, a nonprofit advocate for employer sponsors of multiemployer plans, entitled “Solutions not Bailouts.”
That paper enumerated recommendations to address the nation’s most critically underfunded multiemployer plans, many of which were incorporated into Kline’s 2014 MPRA legislation, including a provision in the law that allows for benefit reductions in the most beleaguered plans.
But legislation did not adopt an amendment to ERISA that would pave the way for composite plans.
With his recent draft proposal, Kline is hoping to muster legislative support for fundamentally changing how the plans are designed. Kline’s proposal was drafted with input from the National Coordinating Committee for Multiemployer Plans, according to a blog post from Segal Consulting, which advises many of the largest multiemployer plans.
In "Solutions Not Bailouts," the National Coordinating Committee for Multiemployer Plans endorsed the need for greater “flexibility” in the statutory governance of multiemployer plans.
Features of defined benefit plans — namely the provision of a lifetime retirement income stream — “must continue their vital role in providing retirement security to millions of multiemployer plan participants,” the organization said in "Solutions Not Bailouts."
But as sponsors’ contribution requirements have increased in light of lower plan funding levels, the multiemployer system has become threatened by withdrawal liability, forcing more employers to leave plans, which are also struggling to attract new employers.
“If a plan gradually loses contributing employers and is also unable to attract new ones, then over time it will ultimately fail regardless of how well funded it might be,” wrote the National Coordinating Committee for Multiemployer Plans in "Solutions Not Bailouts." “Without strong employer participation, no employer sponsored retirement plan can succeed.”
|Kline's plan
The composite plans advanced in Kline’s discussion draft would not be insured by the Pension Benefit Guaranty Corp., which guarantees a base level of benefits in multiemployer plans. PBGC’s multiemployer program is projected to be insolvent in 10 years.
A summary of the discussion draft issued by Kline’s office said “this will protect taxpayers from greater risk of footing the bill for a multibillion dollar bailout” to PBGC.
Under composite plans, participants will receive benefits in the form of annuities, the value of which will be based on employer contributions, participant contributions and “conservative” funding requirements. Benefits can be increased when a plan is expected to be 120 percent funded in 15 years.
Employers that shift to composite plans will still be required to fund their commitments to traditional multiemployer plans, according to a summary of the discussion draft.
In a statement, Kline said, “this proposal will provide more retirement choices for workers, more flexibility for employers, and greater protection for taxpayers. It reflects the input of business and labor leaders, as well as retiree advocates who have long recognized the need to strengthen retirement security.”
The U.S. Chamber of Commerce has issued a statement in support of the discussion draft.
Other stakeholders are wary of composite plans. A letter to members of Congress signed by the Pension Right’s Center, which advocates on behalf of retirement plan participant rights, and several prominent trade unions, expressed “strong opposition” to composite plans, and urged members not to consider the “flawed” proposals in the discussion draft.
The draft’s proposals would weaken existing funding standards, allow sponsors to escape paying penalties for withdrawing from plans, and leave new workers enrolled in composite plans with inadequate protections, the letter said.
“Our organizations do not oppose new forms of retirement savings plans,” the letter opposing Kline’s discussion draft said. “However, we do oppose proposals that permit employers and plans to adopt new plans while putting at greater risk the funding of already unfunded pension promises in existing plans.”
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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.
