PBGC issues guidance on alternative withdrawal strategies from multiemployer plans

The Pension Benefit Guaranty Corp. has issued new guidance for troubled multiemployer plans that are facing potential employer withdrawals, a prospect that could accelerate the insolvency of underfunded collectively bargained retirement plans.

Under the Employee Retirement Income Security Act, employers that leave underfunded multiemployer plans have to pay a withdrawal penalty equal to their share of a plan’s unfunded benefit obligations.

ERISA allows for employers and plans to negotiate alternative withdrawal terms when employers can’t meet their full obligations. One option is to incentivize employers to remain in plans by lowering withdrawal liabilities in exchange for continued participation.

The new PBGC guidance is designed to inform multiemployer plans and sponsors that alternative withdrawal strategies do exist, and that the government agency that insures the plans can help develop proposals that meet legal requirements, explained Thomas Reeder, PBGC’s director, in a press call.

“The goal of the guidance is to advertise the fact that these alternative withdrawal plans do exist—we’re trying to get that word out and make it easier for plans to come to us and suggest an alternative,” Reeder said.

More than 100 multiemployer plans are facing insolvency in the next two decades, with some projected to be unable to meet pension obligations within the next five years. Upwards of 1 million retirees and plan participants are expected to suffer dramatic cuts in pension checks.

That impending crisis has resulted in an uptick of plan trustees seeking approval of alternative withdrawal schemes from PBGC, said Mr. Reeder.

While PBGC approval is not required of plans that implement alternative withdrawal strategies, ERISA requires multiemployer plan sponsors to act in the best interest of retirement plans and participants.

In working with PBGC, plans can be better assured they are meeting their fiduciary requirements, explained Reeder.

“I would not want to be a trustee of a plan that adopted a new withdrawal strategy without some sort of oversight,” said Reeder.

PBGC reviews alternative withdrawal strategies on a case-by-case basis. Less complex proposals can be means tested by agency actuaries within 180 days; more complicated proposals can take up to 270 days.

In order to receive PBGC’s blessing, an alternative withdrawal strategy must prove to be in the best interest of plan participants and not create an unreasonable risk to PBGC’s ability to insure plans. If proposals fail those tests, PBGC provides guidance on modifications to plan trustees.

While proactively working with PBGC to design alternative withdrawal strategies can ultimately discourage employers from leaving plans, and help slow impending insolvencies, Reeder cautions that the process is not a panacea for the worst funded plans.

“We are trying to make a bad situation better,” said Reeder. “We don’t view this as an endgame. We view it as one tool for making things better. We are using every tool we’ve got.”