Congressional Budget Office Finds Multiemployer Pension Rescue Bill is Not Enough

Legislation designed and intended to cure insolvency troubles for several multiemployer pension plans is being examined more closely in an effort to understand its practical impact.

The Rehabilitation for Multiemployer Pensions Act of 2019 (HR 397), works to establish a new agency called the Pension Rehabilitation Administration, which is tasked with disbursing loans to multiemployer defined benefit pension plans that are at risk of insolvency.

A congressional budget office study projected that approximately one-quarter of the pension plans that would be eligible for loans through the bill would become insolvent over the next 30 years and would not fully repay their loans. For those plans that do repay their loans the CBO projects that they will become insolvent within ten years of repayment.

To create its projections, the CBO ran 500 simulations each with different variables examining how they impact pension plan solvency rates.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

As for the cost of the legislation, the CBO concluded that the government would disburse $39.7 billion in loans to multiemployer pension plans in financial trouble, and would be expecting to receive loan repayments in total of $7.9 billion – a net subsidy cost of $31.8 billion.

According to congressional testimony, the cost of doing nothing in terms of lost tax revenue and increased social safety net spending is estimated to be between $170.3 billion and $241.3 billion over the 10-year budget window, and between $332 billion and $479 billion over the next 30 years.

The bill passed the House of Representatives earlier this but may face hurdles advancing given the result of the CBO examination. Lawmakers are working to come up with solutions following recent statements from the Pension Benefit Guaranty Corporation that multiemployer programs are in “dire financial condition”.

Representative Richard Neal, chairman of the House Ways and Means Committee, voiced concerns facing multiemployer pension plans earlier this year. “About 1.3 million Americans are in plans running out of money, because of forces of the marketplace,” Neal contended.

The aggregate funded ratio of multiemployer pensions dropped to 74% from 81% during the second half of 2018. Actuarial and consulting firm Milliman attributed the drop to poor investment returns.

Opponents of the bill argue that a loan structure is not an appropriate solution to the problem. “Forcing hand-picked plans to accept crushing balloon payment loans they can never hope to repay, while putting off the necessary reforms to make them solvent for their workers, hurts workers, businesses, and innocent taxpayers who did nothing to create these failed plans,” said Kevin Brady, head Republican of the House and Ways Committee.

“These plans are failing at an alarming rate,” says AARP, an advocate for the bill. “About 12% of workers with vested multiemployer pensions are in plans expected to run dry within 20 years. And the plans’ weak safety net is getting weaker.”

Related Stories:

Multiemployer Pension Lifeboat Sinking Fast

House Committee Advances Multiemployer Pension Reform Bill

Multiemployer Plans Faltered in Second Half of 2018

Tags: Pension, Pension Rehabilitation Administration, Rehabilitation for Multiemployer Pensions Act

Today’s low-interest-rate environment is spawning some interesting trends from Swiss pension funds, notably a move towards alternative assets in a fashion that their allocation has surpassed 10% for the first time in history, according to new study conducted by European consulting firm Complementa. However, despite continued strong funding, the firms are also trimming benefits to retirees.

While seeing a small exodus from bonds in response to their low rates, the study also found that investments in infrastructure, private debt, and insurance-linked securities are causing the rise in Swiss funds’ allocation to alternatives, according to the study. Real estate allocations reached their highest level in 20 years, the study said.

Swiss pension funds are generally relatively well-funded, with the majority of the largest pensions in the country floating about 100% funded ratios. Complementa said that in the last few months, funding levels increased to an average 109.1%. However, despite the strength, low interest rates triggered widespread benefit cuts to the pensions’ retirees.

Conversion rates used to calculate retirees’ benefits also fell to 5.63%, 50 basis points lower than in 2015. Complementa’s survey of 437 pension providers aggregating €589 billion in assets also found that they expect conversion rates to fall to roughly 5.3% by 2024.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

In the report, Complementa asserted that it is forecasting investment returns to fall, generating a 2019 average of 2.1% after a robust averaged 7.9% over the first eight months of the year.

Alternatives investors are claiming that equity markets have peaked in recent months, according to a report from financial data and information provider Preqin. Recently, the European alternatives industry hit a milestone in reaching €1.62 trillion in assets.

A recent study found that pension funds are increasingly seeking outside help with some certain alternative asset strategies, particularly private equity co-investments.