PBGC issues final rule on aid to underfunded union pension plans

The federal Pension Benefit Guaranty Corp. (PBGC) released a final rule implementing changes to the Special Financial Assistance (SFA) program that will pay up to $91 billion to multiemployer pension plans in financial difficulty.

The final rule was published in the
Federal Register on July 8 and takes effect on August 8, 2022.

Multiemployer defined benefit plans, which serve more than 10 million workers and retirees, are created by agreements between employers in a single industry or related industries, who provide ongoing funding contributions, and unions, who run the plans. These pensions are provided by the PBGC through an account separate from that which protects the pensions of the single employer.

The SFA program was enacted as part of the American Rescue Plan Act of 2021. Prior to the passage of the legislation, the PBGC’s multi-employer pension insurance program was scheduled to become insolvent in 2026.

Cost estimates

The PBGC launched the SFA program under an interim final rule released in July 2021. The agency has updated its cost estimates for the SFA program to reflect the provisions of the final rule.

Based on these updates, PBGC estimates the likely range of total government funds to distribute to multiemployer plans is $74 billion to $91 billion. As of July 6, 2022, nearly $7 billion had already been awarded to 27 plans.

The aggregate amount of EFA that will be distributed to plans will depend on the financial condition of qualifying plans.

“Without this special financial assistance, the retirement benefits of many union workers and their families, through no fault of their own, were in jeopardy,” said US Labor Secretary Marty Walsh. The final rule “will improve the financial well-being of multi-employer plans receiving special financial assistance and improve their ability to pay pension benefits through 2051.”

Employers who contribute to multi-employer pension plans under collective agreements do not receive any reduction in their contribution rate under the relief program, as the rule “generally prohibits reductions in contribution rates to ensure that TFA is not effectively passed on to contributing employers through a reduction in contribution obligations,” attorneys at the Jackson Lewis law firm commented when the interim rule was released last year.

Plans that receive special assistance funds have no obligation to repay the government funds they receive, but are subject to certain terms, conditions and reporting requirements, including an annual statement documenting compliance with the terms. and conditions of the AFE program.

Partisan division

According to a White House statement, “Thanks to the U.S. bailout, every multi-employer pension plan facing near-term insolvency and benefit cuts that receives special financial assistance is expected to remain solvent through 2051, and much longer”.

Republican leaders criticized the final rule and its underlying legislation, which passed in a party-line vote. In response to the final rule, Republican House Education and Labor Committee Leader Virginia Foxx, RN.C., and Republican Leader of the Health, Employment, Labor Subcommittee and Pensions, Rick Allen, R-GA, issued a statement calling the SFA program a “taxpayer-funded bailout” of plans whose union trustees “failed to make the changes necessary to deliver on their promises” to maintain the plan solvency.

Changes to the provisional rule

According to a PBGC fact sheet, the final rule makes various changes that respond to public comments received on the interim rule. For example, the final rule:

  • Allows plans to invest up to 33% of their SFA funds in yield-seeking investments such as publicly traded stocks, with the remaining 67% restricted to high-quality fixed-income investments such as bonds.

  • Modifies the SFA calculation method to use separate interest rates for SFA and non-SFA plan assets and aligns the interest rates used to calculate the value of SFA with reasonable expectations of investment returns.

  • Provides a different methodology for calculating the value of the SFA for schemes that have suspended payouts to retirees under the Multiemployer Pensions Reform Act 2014.

Generally, the provisions of the final rule apply to new applications and are available to plans that have already submitted EFA requests under the interim rule if the plan submits a revised or supplemented application under the final rule.

Comment period

The PBGC has included a 30-day public comment period in these regulations, solely on the amendment to the Withdrawal Liability Condition requiring phased recognition of SFA assets for the purpose of calculating the employer’s Withdrawal Liability.

Interested parties may submit their comments, suggestions and opinions on this provision to [email protected]

Additional information is available on the PBGC US Bailout Special Financial Assistance Program webpage.

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