Are composite plans, that is, risk-sharing plans that protect participants from outliving their assets even if employers are no longer willing, or even able, to make this guarantee, a part of the future of retirement? I’ve no doubt of that.
Is every component of the legal structure of the enabling legislation, the GROW Act, flawlessly designed? That’s less clear — though I am personally willing to cut the drafters some slack because the legislation has been studied with care by the people who intend to adopt those plans, namely plans in the building trades who believe they would work best for their particular circumstances, and I have been persuaded that their advocates intend to manage these plans with prudence and care. I will also admit that my conviction that we need some means of moving forward on this sort of plan, towards eventually enabling Americans outside the multiemployer plan world to enjoy their benefits, increases the degree to which I’m willing to accept flaws.
But opponents of composite plans do raise one concern that must be acknowledged: in order to smooth the transition to the new plan, with its stiffer funding requirements, the legislation enables plans which convert to the composite-type for new accruals, to make up for funding gaps in their existing plan over a 25 year period rather than the 15 year amortization that would otherwise apply. Essentially, some of the funds which would otherwise be directed to paying down a plan funding deficit would instead be “spent” on the higher level of funding conservatism required for the new plan.
A month ago, I shared an analysis of composite plans which found that they would have fared better than existing plans even under difficult economic circumstances. As the press release summarized, “The study found that while a multi-employer retirement plan that was certified in ‘critical and declining’ status suffered significant financial setbacks that are likely to result in the insolvency of the plan despite the recent implementation of a 15 percent benefit cut, a comparable composite plan would have performed more successfully. . . . The study also found that composite plans will achieve greater long-term employer participation than traditional pension plans. That is because the composite plans provide employers with the cost predictability they need to be successful in their businesses.”
“The Western Conference’s actuaries found that workers in a previously healthy plan that converted to a composite plan would face massive benefit cuts under historical market conditions. For example, if Congress had already passed composite legislation and it was law now with investment returns similar to those in early 2020, the future composite plan benefits that workers expected they would earn would be cut 70%, and the composite plan benefits they already earned would be cut 25%. At the same time, workers’ benefits in the existing plan would be cut 21%. To avoid benefit cuts, employers would be required to increase contributions by approximately 82%—above and beyond what they already committed. Under the same scenario, a plan that didn’t transition to the composite structure would weather the market downturn without cutting benefits or increasing contributions.
“In addition, composite legislation risks deepening the current PBGC solvency crisis or creating a new one by artificially reducing the cost of withdrawing from existing plans over time, placing existing plan funding in jeopardy, and exempting composite plans from paying PBGC premiums.”
Who’s right? Who’s wrong? Both – and neither. To be sure, I am assuming that the actuaries’ math is correct, and reasonable according to professional standards.
The Western Conference analysis considers a specific plan that is 93% funded at the time of its transition to a “composite” structure, but nonetheless pays a comparatively high level of its contributions towards paying down its funding deficit — 43% of the total. The hypothetical plan also has an imbalance in its liabilities, with 30% active workers, 10% terminated but not retired, and 60% retirees, which goes a long way towards explaining why a 7% funding deficit can be so “expensive” in terms of debt-retirement. This sort of plan is indeed very vulnerable to market downturns. Would it be appropriate for them to adopt a composite plan following the minimal “letter of the law” in terms of funding? Probably not. Fundamentally, any such plan depends on its trustees (who represent the union and the employers equally) carefully and prudently evaluating the choices in front of them. While I don’t believe that the Western Conference analysis is grounds for discarding composite plans, it is a warning that plans would do well to heed.
In any event, two groups have made statements in support of the GROW Act in response to this study. Here’s the Associated General Contractors of America and allies in a letter to Congressional leadership:
“ Unlike current multiemployer plans, GROW Act composite plans must maintain stricter funding standards which will make sure those plans participants are protected. However, participation in a composite plan is not mandatory – it must be adopted through agreement of the union.”
And here’s the Central States Pension Board of Trustees in excerpts from a press release from July 29:
“Under the GROW Act, a multiemployer pension plan cannot establish a composite plan unless the Trustees voluntarily vote to do so and the plan is extremely well-funded. To the extent the WCT Pension Plan trustees oppose the GROW Act, all they need to do is say no. They do not need to lobby against a bill that will provide a desperately needed lifeline to so many fellow Teamsters.
“The GROW Act is not applicable to Central States or any of the other Teamster pension plans now in crisis. Central States has taken no position on the GROW Act and has never asked participants or Members of Congress to support it.
“However, numerous major labor unions and employer associations strongly support the GROW Act and have made it clear they will oppose a legislative solution that does not include it. Democratic and Republican leaders in Congress have made it similarly clear that the GROW Act is an essential component of any legislation that would end this crisis.”
The bottom line: relaxed funding requirements for the “old” pensions of plans converting to composite plans is a legitimate concern, but not a disqualifying one.
As always, you’re invited to comment at JaneTheActuary.com!