Trustees of struggling multiemployer pension funds have a narrow window of opportunity to do more than just cut benefits in order to survive, if they can take advantage of the Pension Benefit Guaranty Corp. partition program before the agency itself runs out of money, benefits experts said.

The Multiemployer Pension Reform Act of 2014, which allows deeply underfunded plans to reduce benefits to avoid insolvency, also expanded the PBGC’s power to partition plans.

The old partition authority was limited to helping plans in bankruptcy, and affected participants saw their benefits cut to the PBGC levels for multiemployer plans, typically less than $13,000 a year for 30 years of service.

Under the new partition rules, the PBGC can take some of the benefit liabilities to help preserve the solvency of a plan projected to run out of money within 20 years. The program also allows plans to preserve benefit levels to 110% of PBGC-guaranteed amounts.

By one PBGC calculation, some 1.5 million participants are covered by multiemployer plans expected to become insolvent by 2035. Benefit reductions, also known as suspensions, could help preserve payments to 600,000 participants. Partitioning could keep payments above guaranteed minimums for 900,000 participants.

Overall, as many as 10% of 1,427 multiemployer defined benefit plans, with $431 billion in combined assets as of 2014, are likely to become insolvent, by PBGC and other estimates. “Most (of the 10%) are in plans that will require both suspension and partition,” said a PBGC official who declined to be identified.

The most likely candidates for partition are plans where benefit cuts alone won’t be enough for the plan to survive. But a partition — a process that allows multiemployer plans to isolate a group of participants from a troubled employer and have the PBGC provide financial assistance to a new successor plan, while keeping the original plan intact — is considered a better option than dropping to the modest PBGC guarantee level in the event of a plan termination.

In those cases, the combination of benefit cuts with partition assistance “would be appealing,” said a multiemployer plan consultant who declined to be identified. “Clients are just starting to recognize it’s a possibility. I think a lot of plans will find their way there, but it will take a while. Partition is not that obvious a choice,” he said.

Not ready to jump

Other consultants say they have clients actively looking at partitioning, but not yet ready to move forward.

Their reluctance is understandable. For starters, a plan must have taken all reasonable measures to remain solvent, including seeking Treasury Department approval to reduce benefits to 110% of the PBGC-guarantee level, except for older or disabled participants. Until those painful cuts are made, or at least applied for, the PBGC cannot step in and take some of the liabilities.

Unlike the old partition program, which just took financial responsibility for participants in orphaned plans and left a healthy plan intact, plans must now cut benefits for all participants. “That’s why we think some plans are going to be reluctant to do that,” said a second PBGC official who also asked not to be identified.

“That’s a very high hurdle,” said Stan Goldfarb, senior consulting actuary and managing consultant of the Washington office of Horizon Actuarial Services LLC. For his firm’s 80-plus multiemployer clients, many of which are underfunded, “it’s hard to construct a scenario where it would make any sense,” said Mr. Goldfarb. Still, he said, “we are looking at everything.”

It is also not a simple — or inexpensive — calculation to figure out whether applying for partitioning will be enough to save a plan. PBGC officials encourage trustees to work with actuaries and legal experts to analyze the potential benefits and the partition process, so trustees are on board before talking to the regulators.

“The tension between the interests of, and protections afforded to, various generations of participants, the differences in both plan benefit levels (in relation to the PBGC guarantee) and funding outlook, as well as the PBGC claim of having limited capacity for funding partitions, thus encouraging plans to act sooner rather than later, make the analysis very complicated,” said Eli Greenblum, senior vice president and actuary with The Segal Co. in Washington.

Difficult communication

Explaining it to plan participants could be equally daunting, especially along with benefit cuts. “It’s going to be difficult to communicate those choices,” said the first PBGC official.

Then there are the PBGC’s own finances. Multiemployer pension funds caused a record deficit for the agency in fiscal 2013, rising to $42.4 billion from $8.3 billion the year before. An even more dour 2013 projections report gave the multiemployer program a “greater than 50%” chance of being insolvent by 2022, and a 90% chance by 2025.

As a result, the agency must certify that helping a plan through partition won’t hurt the PBGC’s ability to help other multiemployer plans.

“That is going to be one of the biggest hurdles,” said attorney Michael Kreps, a principal with Groom Law Group in Washington who until last month was a top aide on the Senate Committee on Health, Education, Labor and Pensions during passage of the MPRA.

“Congress didn’t give PBGC open-ended authority or much in the way of additional resources,” said Mr. Kreps. “Because of the agency’s fiscal outlook, the universe of plans the agency will be able to help is limited, but trustees searching for ways to save their plans should definitely consider whether the new partition rules are an option.”

When issuing the new partition rules in June, PBGC officials estimated they could take on up to $60 million in payments and process up to six applicants per year.

Informal chats

That $60 million “doesn’t go very far. It’s clear that we’re not going to be able to provide assistance to everyone that might want it,” the first official said. “How much money we have to use these tools will also depend on how many plans will actually use partitions. Some may be able to save themselves, and that might release some of our cash flow.”

Some potential partition candidates have already asked the PBGC for assurance before they start the process, and PBGC officials are encouraging plan executives to contact them informally. “We are really open to talking to plans about how the process would work before they apply,” the official said. “There are some that it will definitely help.”

Success with partitioning also could help the PBGC. Former Director Joshua Gotbaum, now a resident scholar at the Brookings Institution in Washington, said that even in the few previous applications, “people saw that PBGC can save plans if it has the money to do so,” which could keep fewer plans from becoming the PBGC’s problem.

The most recent example, in January 2014 when the PBGC partitioned off former Hostess Brands Inc. participants from the Bakery and Sales Drivers Local 33 Industry Pension Fund in Baltimore to keep it solvent, “absolutely worked like a charm,” Mr. Gotbaum said.

Under the new partition rules, “you’re moving up the part when (PBGC has) to pay, but reducing the cost of saving plans. Partition can save plans from running out of money at all. I think the combination of benefit reduction and partition will save the multiemployer system.”

Source: Pensions & Investments